Home Depot Gets More Constructive On Housing Recovery

| About: Home Depot, (HD)
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Home improvement retailer Home Depot (NYSE:HD) released its Q1 results on May 21. Earnings for the quarter stood at $1.2 billion compared to $1 billion million in Q1 2012, an increase of nearly 18.5%. Net earnings were propelled by top-line growth with a steady recovery in the US housing market driving consumer appetite for home improvement products. The company’s net sales for the quarter stood at $19.1 billion, an increase of about 7.4% over Q1 2012. [1]

Based on its excellent performance and outlook for the balance of the year, Home Depot raised its sales expectations. It now expects sales to be up by approximately 2.8% year-over-year with a rise in comparable store sales of approximately 4%.

Home Depot’s results were robust despite the wet and chilly weather which normally impacts home improvement spending negatively. This only shows the strength of recovery in the U.S. housing market, which has come about due to record low mortgage interest rates and a slowly improving labor market.

Housing Market Recovery, Hurricane Sandy Boost Sales

The housing market recovery continued in the first quarter of 2013, spurred by strong consumer confidence and mortgage rates at near record lows. New home sales rose well above 400,000 per month in the first three months of the year. Sales of existing homes continued to be strong as well during this period. The National Association of Realtors is slated to report existing home sales data for April on Wednesday, which may provide further boost to Home Depot’s stock price. The reason that sales of new as well as existing homes benefit Home Depot is the spending on home improvement by new occupants. [2]

The Federal Emergency Management Agency has approved $1.38 billion in assistance for Sandy victims, which has resulted in an uptick in demand for lumber in the affected areas. Sales related to Hurricane Sandy were approximately $145 million in the first quarter, $30 million higher than the storm sales the company realized from Hurricane Irene in the same period last year. As the rebuilding continues, additional storm-related sales in the second quarter are expected. Home Depot has pegged the figure at $80 million. [3]

Divisional Performance

In its interior business, Home Depot continued to perform well in the sample decor segment. In the flooring segment, a positive response from customers to the company’s SoftSpring carpet, new floor tiles and fusion grout helped drive the segment’s comparable store sales above the company’s overall comparable store sales growth of 4.3%.

In the bath segment, Home Depot’s Moen and Delta Foundations faucets as well as new products from Glacier Bay were the drivers of its performance. The company continued to witness strong results in lighting as customers transitioned to LED bulbs and light fixtures.

The maintenance and repair categories also performed well, with comparable sales growth above the company average in categories like wiring devices, safety and security, plumbing repair, pipe and fittings, tools, hand tools, power tool accessories, cleaning and door locks.

Margins Remain Strong

Home Depot’s gross margin was 34.9% for the quarter, an increase of 20 basis points (0.2%) from last year. The gross margin increase was driven by the company’s U.S. business and was attributed to various factors. The company has taken steps to reduce costs, including efforts to reduce complexity in the supply chain, improve distribution and localize marketing and merchandising activities. Also, Home Depot’s gross margins expanded due to the impact from its recently acquired businesses, which are gross margin accretive. These gains were partially offset by a change in its product mix.

Home Depot expects gross margins to improve further in the upcoming quarters.

We have a Trefis price estimate of $65 for Home Depot’s stock, which will be revised soon.

Disclosure: No positions.