Will HD Supply Earnings Live Up to IPO Hype?

HD Supply (HDS) will release its quarterly report on Monday, marking its first financial release since coming public in late June. With the stock having jumped sharply after its IPO, HD Supply earnings will need to be impressive in order to justify investors' optimism about the industrial-equipment distributor.

HD Supply is arguably best known for its origins as a former division of home-improvement retailer Home Depot. Home Depot sold most of its stake in the wholesale supply business to a group of private equity investors in 2007 in an $8.5 billion deal, but it held onto a 12.5% position in the company at the time. With those private-equity owners having decided to take the company public, has HD Supply already seen its best times, or will a continuing recovery keep the company moving ahead? Let's take an early look at what's been happening with HD Supply over the past quarter, and what we're likely to see in its report.

Stats on HD Supply

Source: Yahoo! Finance. * Pro forma as adjusted figure from company filing.

How will the debut of HD Supply earnings go?
Analysts haven't had long to adjust expectations about HD Supply earnings, but the moves they've made have been negative. In the past month, they've pulled back their views on July quarter earnings by $0.03 per share, and their full-year projections by $0.15 per share. The stock, though, has done well, climbing 28% since its first-day close in late June.

Even with the usual IPO hype, HD Supply didn't reap as large rewards as it had hoped for its private-equity owners. Bad timing was a big culprit, as the stock market overall suffered in late June from the Federal Reserve's initial indications of ending its quantitative easing program. With the company linked, in many people's minds, to Home Depot, HD Supply ended up pricing its shares at $18 after an initial range had suggested a $22 to $25 per-share opening price.

But HD Supply has an arguably broader reach than Home Depot. It distributes maintenance products for commercial users, water equipment for city water and sewer systems and private construction companies, power equipment, and construction goods. The bulk of its business comes from commercial, rather than residential, construction. As a result, the mortgage-interest rate trends that have raised concerns among shareholders of Toll Brothers, Standard Pacific, and other homebuilders aren't likely to filter through to HD Supply's business.

HD Supply isn't without competition in its space, though. Grainger also serves the facilities maintenance business, and has had great success in pushing its earnings higher over the year. WESCO also stands to benefit from positive trends in industrial distribution, although it missed its earnings estimates in its most recent quarter.

In the HD Supply earnings report, watch to see how the company expects to reduce its debt over time. With private equity having imposed substantial debt on HD Supply, the distributor will need to take steps to get its debt-to-equity ratio down in order to avoid any impact from rising interest rates. Otherwise, interest expense could put a ceiling on earnings growth in the future.

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