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3 Big Takeaways From Home Depot's Fourth Quarter

By Matthew Cochrane – Mar 2, 2018 at 9:41AM

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The giant home improvement retailer delivered another big quarter for shareholders. Here's what investors might have missed.

Even after the market's early-February drop, the country's largest home improvement retailer's stock is still up about 30% over the past 12 months. But after Home Depot Inc. (HD -0.55%) reported its fourth-quarter earnings last week, there might be plenty of reasons to think the stock might still have a lot more room to run.

For the quarter, the company's revenue rose to $23.9 billion, a 7.5% increase year over year, and earnings per share grew to $1.52, a 5.6% increase year over year. However, if adjusted for the newly passed Tax Cuts and Jobs Act and one-time employee bonuses, EPS growth would have been a much more robust 17.4%. Home Depot's top- and bottom-line growth was driven by an impressive increase of comparable-store sales of 7.5%.

Home Depot Metric Q4 2017 Q4 2016 Change
Net sales $23.9 billion $22.2 billion 7.5%
Diluted EPS $1.52 $1.44 5.6%
Customer transactions 366.5 million 359.2 million 2%
Average ticket $64.00 $60.65 5.5%

Data source: Home Depot Inc. 

Several items in the company's conference call might be of interest to shareholders, but let's highlight what are probably the three biggest: the big jump in the average ticket per customer, continued strong growth in online sales, and a big dividend increase accompanied by more share repurchases.

A Home Depot storefront from the parking lot in front.

Home Depot delivered a nice dividend hike, strong sales from Pros, and solid e-commerce gains in its fourth quarter. Image source: Home Depot Inc.

The big ticket

Home Depot's 7.5% increase in comparable-store sales was driven by a 2% growth in customer transactions to 366.5 million and a 5.5% increase in the average ticket to $64. The large drive in average ticket price stems from customers making more big-ticket sales, defined as transactions over $900. This category of sales made up 22% of domestic sales and grew 9.8% year over year. Meanwhile, ticket sales under $50 comprised 16% of U.S. sales and grew only 0.8% year over year. Clearly, the bulk of Home Depot's sales increases are coming from customers who spend more, not by increased foot traffic. So what has powered this spending increase from customers?

For starters, Executive Vice President of Merchandising Edward Decker said big-ticket sales drew strength from three primary products: flooring, fencing, and appliances. While it is entirely possible for any type of customer to purchase appliances from the giant home improvement retailer, flooring and fencing are products usually bought by Pro customers undertaking large projects for their customers. Other product lines, described as "Pro heavy" categories, such as lumber, pressure-treated decking, insulation, and gypsum, experienced double-digit growth during the quarter.

Home Depot defines its Pro customer category as "primarily professional renovators/remodelers, general contractors, handymen, property managers, building service contractors and specialty tradesmen, such as installers." At a conference last summer, Home Depot management said Pro customers were responsible for approximately 40% of total sales.

Not only is that a huge base, but these sales are also growing much faster than sales to DIY customers. CEO Craig Menear said Pro sales "outpaced" DIY sales in the fourth quarter. The CEO credited the work the company was doing to "enhance service capabilities" for Pro customers. Pros also gave Home Depot a score of 86% for likelihood to shop again, a 150-basis-point improvement from the previous year.

One Home Depot

Home Depot continues to invest resources to make its interconnected shopping experience, dubbed One Home Depot, as seamless and frictionless for the customer as possible. In Q4, the company took more steps toward this goal. Menear stated:

Our interconnected business made great strides in 2017 as the team continued to enhance our digital assets to enable a more seamless experience for our customers no matter how they choose to shop with us. We implemented a new e-commerce platform, enhanced our search and mobile functionality, increased checkout speed, and expanded chat functionality to improve the customer experience with our online contact centers.

Online sales grew 21% year over year and now comprise 6.7% of all sales. As proof that the interconnected shopping experience was working, Menear pointed out that 46% of all online orders are picked up in-store. For the past several years, Home Depot has grown its online sales by at least $1 billion, and the management team said that was its goal again for fiscal 2018.

Shareholder-friendly policies

The fourth-quarter report brought even more evidence of the company's commitment to its shareholder-friendly policies. For the current quarter, management announced a 15.7% dividend increase, which brings the quarterly payout to $1.03, resulting in a dividend yield of about 2.19% and a forward payout ratio of about 55%. After repurchasing $8 billion of outstanding shares in fiscal 2017, the company is initially targeting $4 billion in share repurchases for 2018.

I say "initially" because the company will have leftover cash after repatriation of foreign earnings. When asked about this money, CFO Carol Tome said:

Based on the cash flow guidance that we've given you and the use of cash, you're like, 'Wow, you're going to have some leftover cash.' That's right. We are. We're exploring what to do with that cash. It could be additional share repurchases, dividends, pay back debt, build cash for the future, and so on. We're going to take our time to think through this and, as we determine what to do with the cash, we will let you know.

Is the best yet to come?

Home Depot continues to deliver for its investors every single quarter. Its returns have easily outpaced those of the S&P 500 over trailing periods of six months, one year, three years, and five years -- and the longer the comparison period, the more the gap widens. For a company targeting and winning customers who spend more money, expertly navigating retail's evolving digital landscape, and continuing to dedicate money to buybacks and dividends for shareholders, the streak of outperforming the market is unlikely to end any time soon.

Of course, the fact that the company just found some spare change under its proverbial couch pillow thanks to the new tax legislation doesn't hurt either. Speaking of taxes, Home Depot's effective tax rate this past quarter was 39.6%. For fiscal 2018, management is estimating it will be about 26%. Given the company's history of outperformance and the above catalysts, investors looking for a proven winner could do a lot worse than Home Depot.

Matthew Cochrane owns shares of Home Depot. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.

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