Home improvement retailer Home Depot’s (HD) performance over 2012 has inspired a lot of confidence in investors. The company’s stock rose by over 40% during the year as the management posted strong and consistent sales growth over the first three quarters. The primary reason behind Home Depot’s meteoric rise has been the recovery of the U.S. housing industry as 2012 finally saw the resurgence of key housing metrics such as record levels of home construction, declining vacancies, lower mortgage default rates and rising home prices.
Home Depot certainly seems to have leveraged the increased demand for homes and home-related products well. Its total sales were up about 3.9% for the first nine months. Meanwhile, the company has also done well to complement top line growth with key cost reduction strategies, boosting the bottom line. The company’s net earnings were up by a healthy 13% over the nine-month period. As the company gears up for the launch of its fourth quarter earnings on February 26, investors certainly have good reasons to look forward to another round of strong results.
Housing Recovery Remains Strong, Hurricane Sandy To Further Boost Sales
The recovery of the housing market continued well into the latter half of 2012. New home sales made their way up to 367,000 for 2012, the highest since 2009. Meanwhile, construction spending rose 0.9% in 2012 to $885 billion, the highest levels seen since August 2009. (“Construction Spending Rises More Than Forecast on U.S. Housing“, Bloomberg, February 2013) The growth in demand for new housing has been complemented well by lower foreclosure rates. In December 2012, there were around 56,000 completed foreclosures in the U.S., compared to 71,000 in December 2011. Another key factor that should inspire confidence in investors is the rising prices of basic construction materials such as lumber – a very strong signal of strengthened demand for home improvement products. All of this adds up to strong demand for home improvement projects, and therefore, more customers for Home Depot.
Meanwhile, sales related to the household repairs following the damage caused by Hurricane Sandy should also factor in a big way in the final quarter results, further boosting the top line. Although the sales effect of Sandy will most likely be spread throughout the coming quarters in 2013, a majority of the repair work would have commenced towards the end of 2012.
The company’s net sales growth over the first nine months of 2012 stood at 3.9%, with the growth in the third quarter at about 4.6%. The sales performance for the fourth quarter should also be somewhere in the 4-5% range.
Margins To Remain Strong With Cost Reduction Programs Leading The Way
Home Depot’s earnings over the first nine months of 2012 have been given a strong boost by the company’s focus on reducing costs, including efforts to reduce complexity in the supply chain, improve distribution, and localize marketing and merchandising activities. The company’s operating margin for the first nine months of 2012 stood at 10.65%, compared to 9.8% a year ago. This is largely a result of reduced selling, general and administrative expenses (SG&A), which fell from 22.3% of total revenues in 2011 to 21.8% of total revenues in 2012.
We have a Trefis price estimate of $59 for Home Depot’s stock, which we will revise once the company’s 2012 full year earnings are out.
Disclosure: No positions.