FINANCE

Analysis: Home Depot successfully defending its business against online players

The devastation caused by hurricanes and wildfires has been anything but a disaster for Home Depot, with the rebuilding efforts pushing already strong sales growth even higher. This quarter’s 8.1% lift in net revenue and the 7.9% rise in comparables are both well above the long-run average. The good news is that this elevated demand is likely to continue for at least a couple more quarters, which is one of the reasons Home Depot has raised its full-year guidance.

Although natural disasters have had a positive impact on sales, their effect on margins has been less satisfactory. A lower margin rate on rebuilding products as well as higher hurricane-related expenses from disruption to stores and supply chains has damaged the bottom line. In the event, thanks to the underlying strength of the business, Home Depot’s operating profit rose by 10.8% over the prior year. However, it would have risen by 12.4% without the expense from the disasters.

The revenue benefits from rebuilding activity are helpful but, for Home Depot, they are the icing on the cake of an already strong business, which has been on an upward trajectory for many years. Fortunately, we see few signs that this direction of travel will change over the next fiscal and beyond.

Favorable economic tailwinds, especially from the housing market, look set to continue in 2018. A shortage of housing in many U.S. markets is keeping prices inflated and activity levels high. This will fuel both the need and willingness of consumers to make home improvement related purchases. In our view, Home Depot will be the primary beneficiary of this growth.

Less intense tailwinds will also help performance. This includes the difficulties of Sears which we believe continues to cede market share in categories like appliances, tools, and outdoor products. While gains from Sears’ demise will be spread among many retailers, it looks likely that Home Depot will take the biggest chunk of share in 2018.

While external conditions are helpful, Home Depot has also engineered its success with a number of smart investments. Foremost among these is the development of the omnichannel offer. As much as online currently plays a relatively small role in home improvement purchasing, its influence is rising, and it is now becoming a more significant engine of growth across many categories. Home Depot has created a proposition that ensures it is the go-to destination online and is successfully defending its business from the rise of Amazon and other Internet players.

Alongside consumer market, Home Depot has also made excellent inroads with the professional consumer. The integration of Interline – the commercially focused repair and maintenance products business Home Depot acquired in 2015 – continues to be beneficial. In the near-term, we believe that there is much more share to gained from this market.

The short-term uplift from disaster-related spending, robust underlying demand, a good seasonal holiday offer, gathering momentum with pros, and strong traction online, all bode well for Home Depot. Looking ahead, we expect the business to end this fiscal year on a high.

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Dick’s Q3 tops estimates; issues weak 2018 outlook on business investments

BY Marianne Wilson

Dick’s Sporting Goods topped Street expectations in its third quarter, but forecast a big drop in profit next year based as its makes significant investments in e-commerce and other parts of its business.

The nation’s largest sporting goods retailer reported that consolidated net income totaled $36.9 million for the quarter ended Oct. 28, or $0.35 per diluted share, down from $48.9 million, or $0.44 per diluted share, in the year-ago period. Earnings, adjusted for pretax gains, came in at 30 cents per share. Analysts predicted an average of 26 cents per share.

Net sales increased 7.4% to approximately $1.94 billion, also better than expected. E-commerce sales increased about 16%, accounting for 10.3% of total sales. Consolidated same-store sales decreased 0.9%.

“In the third quarter, we delivered earnings per diluted share and comp sales at the high end of our expectations, with continued double-digit growth in e-commerce,” said Edward W. Stack, chairman and CEO. “As expected, margins were under pressure in this highly promotional environment, but our strategy for this environment enabled us to continue to capture market share. As we look to the fourth quarter, we are comfortable with our prior implied sales and earnings outlook, and believe we are well positioned to gain additional market share.”

Looking ahead to next year, Dick’s said plans to make significant investments in its business, including in its e-commerce operations, in-store technology and store payroll. Meaningful investments will also be made to Dick’s Team Sports HQ, and in the development and support of its private brands.

“All of this will have a short-term negative impact on the company earnings; however, we expect these investments will pay meaningful dividends in the future,” Stack said. “Given these investments, continued gross margin pressure and approximately flat comp sales, we expect earnings per diluted share to decline by as much as 20% in 2018.”

As of October 28, 2017, the company operated 719 namesake stores in 47 states, 98 Golf Galaxy stores in 32 states, and 35 Field & Stream stores in 16 states.

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Hurricanes, fashion missteps take toll on off-price giant

BY Marianne Wilson

High-flying TJX didn’t fly quite so high in its third quarter, reporting a rare miss in sales.

The TJX Cos. reported flat same-store sales in its third quarter, citing the negative impact of a series of hurricanes during the period, unseasonably warmer temperatures and a fashion miss.  Analysts had expected an increase of 2.4%.

Net sales for the quarter, ended Oct. 28, increased 6% to $8.8 billion, slightly below estimates. Same-store sales were flat compared to last year’s 5% increase. By brand, same-store sales were down 1% at Marmaxx (Marshalls and T.J. Maxx), and up 3% at Home Goods and 1% at TJX International.

Net income rose nearly 17% to $641.44 million, or $1 per share, on higher margins, compared to $550 million, or 83 cents per share, in the year-ago period. Gross profit margin came in at 29.8%, up from 29.5% last year.

“While sales were not as strong as we would have liked, we were pleased that sales trends at Marmaxx improved as the weather turned more seasonable,” said Ernie Herrman, CEO and president. “Further, customer traffic, or transactions, were strong and up at every major division. Importantly, our consolidated merchandise margin increased, which we believe speaks to the flexibility of our off-price business model.”

On the chain’s quarterly call, Herrman also cited fashion missteps, which he said would be corrected in the current quarter.

“It was absolutely a fashion miss … this was, really, on our own part a selection issue and had nothing to do with availability out there,” Herrman said.

Looking ahead, Hermann said the fourth quarter is off to a strong start.

“We have excellent inventory liquidity to capitalize on the plentiful opportunities we are seeing for quality, branded merchandise in the marketplace,” he said.

The retailer expects holiday-quarter same-store sales growth of 1%-2%. It maintained its fiscal 2018 profit forecast at the high-end of the range of $3.91 to $3.93 per share.

During the third quarter, the company increased its store count by 139 stores. As of October 28, 2017, the retailer operated a total of 4,052 stores in nine countries, the United States, Canada, the United Kingdom, Ireland, Germany, Poland, Austria, the Netherlands, and Australia, and three e-commerce sites.

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