Earnings Preview: More Retail Results With Home Depot Reporting Tomorrow

Home Depot Inc HD reports third-quarter earnings before the opening bell on Tuesday, Nov. 14. So far this year, the stock is up 22.19% year-to-date, although it has seen some big swings since mid-June as investors digested news that Sears Holding Corp SHLD would start selling some appliances on Amazon.com, Inc. AMZN, and a string of hurricanes and tropical storms hit the Southeastern U.S.

In the second quarter, HD reported better-than-expected results, earning $2.25 per share on revenue of $28.11 billion. Growth in the number of customer transactions accelerated to 2.8% from 1.6% in the first quarter, according to the company, and comparable-store sales increased 6.3% year-over-year. At the same time, the average ticket increased 3.6% year-over-year to $63.05—management noted that commodity price inflation in lumber, building materials, and copper positively impacted that growth by 68 basis points.

After reporting second-quarter results, management upped their guidance for fiscal 2017, saying they expected sales to increase roughly 5.3% year-over-year, and comparable-store sales to increase approximately 5.5%. Diluted earnings per share are expected to grow 13% year-over-year to $7.29, including the impact of $7 billion of share repurchases.

This quarter’s results could provide investors and analysts with a better picture of how the recent hurricanes impacted the overall business. According to research firm Global Data, Texas alone, historically, has made up about 10% of HD’s revenue. After Hurricane Sandy hit the East Coast of the U.S. in 2012, HD management attributed $242 million of sales in the fourth quarter to rebuilding efforts from that storm alone.    

As a home improvement retailer, overall housing trends have an outsized impact on HD. On last quarter’s earnings call, management said they thought  they were in about the sixth inning of the overall housing recovery. Some of the factors HD evaluates include the National Association of Realtor’s Housing Affordability Index, which stood at 160.7 in September, and private residential fixed investment, which stands at about 82% of where it was when it peaked in 2006.

HD management has also continued to point out aging housing stock as a tailwind for the company. On last quarter’s call, CFO Carol Tome said that 66% of the housing stock is older than 30 years, and 51% of it is older than 40 years. Naturally, as houses age, they require more upkeep and repairs.  

One area that analysts have honed in on recent quarters is HD’s online sales, which grew 23% year-over-year in the second quarter and now accounts for just over 6% of its overall revenue. Since 43% of customers pick up their online purchases in store, management has emphasized an interconnected retail approach across their stores and digital properties.

And as Washington continues to work on potential tax reform, analysts have said that they see HD benefiting if the U.S. corporate income tax rate is reduced as initially planned. In the second quarter, HD’s effective tax rate was 36.6%, and management expects it to be around 36.3% for the full year. 

FIGURE 1: HOME DEPOT YTD PERFORMANCE. So far this year, HD’s stock, which is charted above, has outperformed the S&P Homebuilders Select Sector Index ($SPSIHO), shown as the pink line, and the S&P 500 (SPX), shown as the teal line. HD is up 22.19% year-to-date, while the S&P Homebuilders Index is up 19.48% and the S&P 500 is up 14.37%. Chart source: thinkorswim^® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Home Depot Earnings and Trading Activity

For the third quarter, HD is expected to report earnings of $1.81 per share, up from $1.60 per share in the prior-year quarter, on revenue of $24.47 billion, according to third-party consensus analyst estimates. HD has beat top and bottom-line estimates in the past four quarters.

The stock has pulled back a little bit from its October all-time high of $167.94 and shares closed at $164.11 on Friday. Around the upcoming earnings release, options traders have priced in about a 2.7% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading at the November 17 expiration, calls have been active at the 165 and 170 strike prices, while puts have been active at the 160 and 165 strike prices. So far trading has been heavier on the call side, with about three calls trading hands for every put. As of this morning, the implied volatility sits at the 73rd percentile. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

It’s a busy week on the economic data front. The October Producer Price Index (PPI) is due Tuesday morning followed by the Consumer Price Index (CPI) on Wednesday morning. Wednesday morning will also bring October’s retail sales, as well as crude oil inventories. On Friday, we’ll get a look at housing data with building permits and housing starts.

Although earnings season has been winding  down, this week includes results from some of the big retailers. In addition to HD, Target Corporation TGT, Wal-Mart Stores Inc WMT and Best Buy Co Inc BBY are slated to report over the next few days. If you have time, make sure to check out today’s market update to see what else is happening.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.