Will Home Depot Meet Analysts’ Expectations in Q1?

Amid the financial turmoil due to COVID-19, Home Depot (NYSE:HD) continues to stand tall. Many businesses have been closed due to lockdowns. However, Home Depot has remained open since it sells essential products. The expectation of increased sales in consumer staples led to a rise in the company’s stock price. YTD, Home Depot has returned 7.4%. The company has outperformed the broader equity markets and its peers. During the same period, the S&P 500 Index has fallen by 11.7%, while Lowe’s (NYSE:LOW), Bed Bath & Beyond (NASDAQ:BBBY), and Williams-Sonoma (NYSE:WSM) have fallen by 7.8%, 69.1%, and 11.3%, respectively. Meanwhile, Home Depot will likely report its first-quarter earnings before the market opens on May 19. Let’s look at analysts’ expectations.

For the first quarter, analysts expect Home Depot to report revenue of $27.5 billion. The estimate represents a rise of 4.3% from $26.4 billion in the first quarter of 2019. The positive SSSG and addition of new stores could drive the company’s revenue. By the end of 2019, the company operated 2,291 stores compared to 2,289 stores at the end of the first quarter of 2019.

Under the “One Home Depot” project, the company has been focusing on blending its physical and digital platforms. The company will provide customers with a frictionless experience. To drive digital sales, Home Depot has been working to improve its search functionality, category presentations, product content, and enhanced fulfillment options. In the fourth quarter, the company’s online sales grew by 20.8%. Meanwhile, 50% of the sales were picked up from stores that justified the company’s interconnected retail strategy. Generally, professional customers are big-ticket buyers. To attract more professional customers, Home Depot has been expanding its digital capabilities on its B2B website to meet professional customers’ specific needs. The company has over 1 million professional customers registered on its website.

Despite the expectation of an increase in the top line, analysts expect Home Depot’s bottom line to fall this quarter. For the quarter, they expect the company’s EPS to fall 0.2% from the first quarter of 2019 to $2.27. A lower EBITDA margin and higher interest expenses could mitigate the positive effects of revenue growth and drag the company’s EPS down.

For the quarter, analysts expect the company’s EBITDA margin to decline from 15.5% to 15.0%. The lower gross margin and higher SG&A expenses could lower the company’s EBITDA margin. Increased lower-margin consumer staples could lower the company’s gross margin. The SG&A expenses could rise from 18.7% of the company’s sales to 19.1%. Also, increased sanitization and precautionary measures for employees could hike the company’s SG&A expenses.

On February 24, Home Depot’s management announced quarterly dividends of $1.50 per share, which represents an annualized payout of $6.00 per share. As of May 14, the company’s dividend yield was at 2.61% with its stock price trading at $234.48. Meanwhile, in the last quarter, the company returned $7.26 billion to shareholders through dividends and share repurchases. The company’s operating cash flows were $13.72 billion, which covered its cash outflow. So, I expect Home Depot to increase its dividends consistently.

Home Depot has made a significant recovery after the global meltdown. Concerns about COVID-19 dragged Home Depot stock to a low of $140.63 on March 18. Since then, the stock has increased by 66.7% and reached $234.48 as of May 14. Meanwhile, the higher stock price has increased Home Depot’s valuation multiple. As of Thursday, the company was trading at 23.6x analysts 2020 EPS estimates of $9.92 and at 21.6x analysts 2021 EPS estimates of $10.87. The estimates represent a YoY decline of 3.2% in 2020 and growth of 9.6% in 2021.

Analysts had mixed reactions to Home Depot in the last two months. Since the beginning of April, Instinet and Jefferies have increased their target prices. Meanwhile, Stifel, JPMorgan Chase, UBS, SunTrust Robinson, Telsey Advisory Group, and Piper Sandler have all slashed their target prices. Overall, analysts favor a “buy” rating. Among the 32 analysts, 65.6% recommend a “buy,” 31.3% recommend a “hold,” and 3.1% recommend a “sell.”

I have been bullish on Home Depot for some time. The company could experience near-term pressure due to the economic downturn. However, with the company’s strong stock supply chain and integrated shopping experience, it could easily increase its market share in the home improvement segment. So, investors with longer prospects should keep accumulating the stock on dips.