FINANCE

A surging Home Depot Q3 beats Street; raises full-year outlook

BY Marianne Wilson

Repairs resulting from hurricanes and other natural disasters helped Home Depot beat estimates in its third quarter, and also caused the retailer to raise its outlook for the year.

Net earnings increased 10.0% to $2.2 billion, or $1.84 per share, for the quarter, ended Oct. 29. Analysts had expected earnings per share of $1.81.

Revenue rose 8.1% to $25 billion, topping estimates. Shoppers’ average ticket was 5% higher, and customer transactions rose by 2.5%. Total same-store sales rose 7.9%, also more than expected.

The retailer said hurricanes and other disasters boosted comparable store sales growth by about $282 million.

“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,” commented Neil Saunders, managing director of GlobalData Retail. “Fortunately, we see few signs that this direction of travel will change over the next fiscal and beyond.”

Based on its year-to-date performance, underlying strength of the core business, and projected hurricane recovery sales, the company lifted its fiscal 2017 sales growth guidance and now expects sales will be up approximately 6.3% and comp sales will be up approximately 6.5%.

“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,” said Saunders. “Looking ahead, we expect the business to end this fiscal year on a high.” For more, click here.

The company increased its store count by one unit in the third quarter, bringing its footprint to a total of 2,283.

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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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