Home Depot: Committed To Customers And Investors

| About: Home Depot, (HD)

In its third quarter, The Home Depot (NYSE:HD) reported net earnings of $1.4 billion, an increase of 49% year over year. The reason behind this tremendous growth is Home Depot's focus towards its customers' satisfaction. The company ensured that around 60% of its employees' time is devoted to customer facing jobs. Also, Home Depot is expanding its referral service, Redbeacon. This online service connects customers with service providers like carpenters, plumbers, and painters. The company aims to roll out this service nationwide, which is currently present in 11 states. Though, this service accounts for merely 4% of Home Depot's revenue, but I think Redbeacon is important for driving sales for two reasons. First off, the customer satisfaction, as it increases Home Depot's offerings and customers need not search for service providers. Second, it will bring in more business, as the company will be contracting with service providers, which will need materials for doing the same.

On account of the continuous housing recovery and third quarter results, Home Depot now expects diluted EPS of $3.72 for this year, from the previous forecast of $3.60. Its competitors Lowe's Companies (NYSE:LOW) and Lumber Liquidators (NYSE:LL) have also raised their fiscal year 2013 outlook on the heels of the housing recovery and better third quarter results. Lowe's reported 26% year-over-year earnings growth in its third quarter results update, bringing it to $499 million. Home Depot has more stores in Metropolitan areas, especially in California. Lowe's has approximately 110 in California, less than half of Home Depot's store count in California. To enhance the presence in the California market, Lowe's acquired Orchard Supply Hardware for approximately $205 million. 89 of Orchard's 91 stores are located in California and this acquisition will increase Lowe's access to California customers. The company will update the performance of Orchard Supply Hardware in the fourth quarter of fiscal year 2013 for the first time, which will provide insight as to what extent it was able to compete with Home Depot.

Another competitor of Home Depot, Lumber Liquidators, reported earnings growth of 58.4% year over year, bringing it to $20.4 million in its third quarter. At the end of the third quarter, the company had 400 stores, and with the third quarter results and booming housing market, it plans to expand its stores count. Lumber Liquidators expects to open 10-12 new stores in the fourth quarter, amassing 29-31 new stores in fiscal year 2013. With this, the company has updated its 2013 outlook. It now expects full year sales to be in the range of $985 million to $995 million, from the previous range of $940 million to $963 million.

Shareholder's wealth maximization: First priority

For the past several years Home Depot has been increasing the amount distributable to its shareholders through dividends and share repurchase program. In the trailing twelve months, the company has distributed $2.1 billion to its shareholder's through dividends. Its dividend has risen 34%, bringing it to $0.39 per share in the third quarter 2013. Home Depot has a trailing twelve month dividend yield of 1.50% and forward dividend yield of 2%, implying increasing dividends for the next year.

Along with the dividend distribution, Home depot has announced a huge share repurchase program with the commencement of this fiscal year. The board of directors authorized a $17 billion share repurchase program, almost 20% of the company's market capitalization, which will be competed by the end of fiscal year 2015. On a year to date basis, it has repurchased $6.4 billion worth of shares. Through this repurchase program, its outstanding shares has reduced to 1.43 billion in the third quarter from 1.486 billion in the first quarter, which has contributed towards an EPS upsurge to $0.95 from $0.83 in the first quarter. Home Depot intends to repurchase approximately $2.1 billion of its outstanding shares during the remainder of this year, which will further enhance its earnings per share.

Dividend and share repurchase activity calls for a company to have a strong liquidity position, but Home Depot posted declining liquidity in the first quarter of 2013. During the same period, Home Depot's current assets grew merely 5.86% in fiscal 2012 year over year, whereas its current liabilities witnessed a growth rate of 22.2% in fiscal 2012 year over year. Uneven growth of these two parameters affects the company's short term liquidity and indicates a weaker financial position, which could impact the cash distribution to its shareholders.

To overcome this situation, Home Depot is depending upon external sources to maintain the liquidity of its operations. The company recently raised $3.25 billion as long term debt, which is the biggest amount Home Depot has raised in the past seven years. The proceeds will be used to refinance the debt and share repurchase program. This strategy will help the company to maintain liquidity and indicates that the company remains committed to rewarding its investors with steadily growing returns.

Summing up

Home Depot is witnessing better than expected results on account of the housing recovery. With this, the company is adopting strategies to maintain liquidity and distribute profits to shareholders through its share repurchase program and dividends. Year to date, the company's stock price increased approximately 23%, but despite of this upsurge, the company is repurchasing its stock, which indicates that there is still an upside potential in the stock price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.