Home Depot's Earnings Increase 6% Year Over Year, But Is It A Buy?

Feb.26.14 | About: Home Depot, (HD)

The Home Depot, Inc. (NYSE:HD) is a home improvement retailer. The company reported earnings before the market opened on 25Feb14 and on the surface all the results seemed mixed with the company reporting earnings of $0.73 per share (beating estimates by $0.02) on revenue of $17.7 billion (missing estimates by $0.22 billion). What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Income Statement

Income Statement (millions)

4Q13

4Q12

Y/Y

Revenues

$ 17,696

$ 18,246

-3%

Cost of sales

$ 11,504

$ 11,880

-3%

Gross profit

$ 6,192

$ 6,366

-3%

Selling, general and administrative

$ 4,024

$ 4,217

-5%

Depreciation and amortization

$ 407

$ 399

2%

Operating Income

$ 1,761

$ 1,750

1%

Interest and investment income

$ (4)

$ (6)

-33%

Interest expense

$ 182

$ 166

10%

Other

$ -

$ -

#DIV/0!

Earnings before income taxes

$ 1,583

$ 1,590

0%

Provision for income taxes

$ 570

$ 569

0%

Net earnings

$ 1,013

$ 1,021

-1%

Avg. basic outstanding shares

$ 1,382

$ 1,479

-7%

Avg. diluted outstanding shares

$ 1,391

$ 1,491

-7%

Earnings per basic share

$ 0.73

$ 0.69

6%

Earnings per diluted share

$ 0.73

$ 0.68

6%

Click to enlarge

Looking at the income statement at first glance is very appealing as you look at the bottom line and notice that earnings increased by 6% from last year. I'd like to sift through the income statement to see why that was the case. The first thing I notice is that gross profit decreased by 3% which is never a good sign. On the bright side I see that operating income increased by 1% from the prior year. Interest and investment income decreased 33% and earnings before income taxes remained slightly flat. Net earnings decreased 1% overall.

Balance Sheet

Balance Sheet (millions)

4Q13

4Q12

Y/Y

Cash and cash equivalents

$ 1,929

$ 2,494

-23%

Receivables

$ 1,398

$ 1,395

0%

Merchandise inventories

$ 11,057

$ 10,710

3%

Other current assets

$ 895

$ 773

16%

Total current assets

$ 15,279

$ 15,372

-1%

Property and equipment

$ 23,348

$ 24,069

-3%

Goodwill

$ 1,289

$ 1,170

10%

Other assets

$ 602

$ 473

27%

Total assets

$ 40,518

$ 41,084

-1%

Accounts payable

$ 5,797

$ 5,376

8%

Accrued salaries and related expenses

$ 1,428

$ 1,414

1%

Current installments of long-term debt

$ 33

$ 1,321

-98%

Other current liabilities

$ 3,491

$ 3,351

4%

Total current liabilities

$ 10,749

$ 11,462

-6%

Long-term debt, excluding current installments

$ 14,691

$ 9,475

55%

Other long-term liabilities

$ 2,556

$ 2,370

8%

Total liabilities

$ 27,996

$ 23,307

20%

Total stockholders' equity

$ 12,522

$ 17,777

-30%

Total liabilities, redeemable noncontrolling interests and shareholders' equity

$ 40,518

$ 41,084

-1%

Click to enlarge

On the current assets side of things we see that cash and cash equivalents have decreased 23% which is pretty high. Other current assets have increased by 16% but total current assets have decreased by 1%. Goodwill has increased by 10% while other assets have increased 27%, making total assets decrease 1% from the prior year. Current installments of long term debt have decreased a whopping 98% bringing total current liabilities down 6%. However, long-term debt increased 55% and total liabilities have increased 20% from the prior year.

Conclusion

The company reported earnings which were 6% higher than the year before on decreasing revenue while the share price was down 23.48% in the past year excluding dividends. The increase in earnings was due primarily to share repurchases. This earnings report is crappy to say the least because I don't like to see a drop in revenues with financial engineering being the primary reason for the increase. On a fundamental basis I believe this company is fairly valued with respect to 2015 earnings. The stock was up 3.99% the day of reporting earnings in the face of an S&P500 which lost 0.13%. I'm going put the stock in the penalty box till I see some better revenue.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long HD. 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.