Will Home Depot Deliver a Strong Second Quarter?

Nobody knows with absolute certainty whether Home Depot will deliver in the second quarter, but investors have ways to find important clues about Home Depot’s short- and long-term potential.

Jul 28, 2014 at 4:19PM
Homedepot From Site

Source: HomeDepot.com

Home Depot (NYSE:HD) doesn't report its second-quarter results until Aug. 19, but you always want to be ahead of the game.

The following information looks at some key points as well as comments made by upper management. Both of these provide important hints as to how Home Depot is performing in the second quarter and how it's likely to perform in the future.

 

Bathtub effect
"Bathtub effect" is a phrase used by Frank Blake, chairman and chief executive officer of Home Depot. This phrase refers to a situation in which weak first-quarter sales caused by severe winter weather are likely to be counterbalanced by strong sales in the second quarter.

In other words, if people needed to work on their homes during the winter but couldn't get to Home Depot or Lowe's (NYSE:LOW), then this will result in pent-up demand for home improvement store merchandise in the second quarter. But that's not the only reason the second quarter should look good for Home Depot and, to a lesser extent, Lowe's.

Further proof
Home Depot suffered negative comps in its Northern division, which is also its largest division. However, domestic comps increased 3.3% for the quarter year over year. This means that regions not affected by severe winter weather performed exceptionally well.

In fact, according to Blake on the company's conference call, the Southern and Western divisions performed better than expected as their comps almost doubled. Also keep in mind that Home Depot was up against a very tough comparison in the year-ago first quarter due to increased repairs in the wake of Hurricane Sandy.

Now add the fact that when asked about second-quarter sales thus far (through May) on the conference call, upper management more than once used the word "robust" in reference to sales.

Lowe's chairman, president, and CEO, Robert A. Niblock, didn't sound quite as excited about his company's second-quarter performance, stating: "Performance has improved in May, which, together with our strengthening execution, gives us the confidence to reaffirm our sales and operating profit outlook for the year."

Reaffirming guidance is a positive, but Home Depot took it a step further by raising its fiscal-year diluted earnings-per-share guidance. It now expects diluted earnings per share to increase approximately 17.6% to $4.42. 

Other positives for Home Depot:

  • It now has more than 1.5 million Pro Xtra loyalty program members with no sign of a slowdown.
  • It expects domestic home price appreciation, affordability, and increased demand for home improvement products due to aging homes.
  • Online sales increased 39% in the first quarter year over year (now 4.2% of total net sales versus 3.1% of total net sales in the year-ago quarter).
  • It reported positive comps in Canada (local currency).
  • It reported 42 consecutive quarters of comps growth in Mexico.
  • Transactions for tickets under $50 increased 1.6% in the first quarter (20% of sales).
  • Transactions for tickets over $900 increased 2.5% in the first quarter (20% of sales).
  • Pro sales from larger customers (who spend $10,000 or more per year) grew more than twice as fast as the company average.

If the big spenders are opening their wallets for larger projects and no slowdown is currently present in the housing market (watch the 30-year fixed mortgage for hints at future changes), then the near future is still bright for now. This is in addition to smaller spenders continuing to contribute to sales increases. This is all occurring while Home Depot has managed to maintain a gross margin of around 35% and does not have to worry about margin contraction due to excessive promotions. 

No internal threats to Home Depot exist at the moment, which is an excellent sign for long-term investors. In the short to moderate term, the housing market could falter, but Home Depot is best of breed. Therefore, it should be capable of weathering any storms.  

The bottom line
Home Depot isn't expected to have a blowout quarter. In fact, it already admitted that the fourth quarter should be its strongest of the fiscal year. However, there are definitely more positives than negatives for Home Depot at the moment, which bodes well for the company's near future as well as its distant one.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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