Why Is Home Depot (HD) Down 0.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Home Depot (HD). Shares have lost about 0.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Home Depot due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Home Depot Q2 Earnings & Sales Top Estimates

Home Depot has posted second-quarter fiscal 2020 results, wherein earnings and sales beat the Zacks Consensus Estimate and improved year over year. The company has benefited from increased investments across the business, which allowed it to respond quickly to changing customer preference during the coronavirus pandemic. Further, it expects momentum in its One Home Depot investment strategy to help navigate through the current situation and position it for long-term growth.

In the fiscal second quarter, the company incurred an additional $480 million to provide incremental benefits to its associates, including weekly bonuses for hourly associates in stores and distribution centers. Year to date, it paid $1.3 billion for enhanced pay and benefits in response to the pandemic. Moreover, the company’s performance in the first half resulted in record a payout of success sharing under its profit-sharing program for hourly associates.

Q2 Highlights

Earnings of $4.02 per share improved 26.8% from the year-ago quarter. The bottom line also beat the Zacks Consensus Estimate of $3.82. Results gained from strong top-line growth as well as margin expansion.

Net sales rose 23.4% to $38,053 million from $30,839 million in the year-ago quarter and beat the Zacks Consensus Estimate of $35,111.2 million. Sales benefited from the company’s robust and flexible interconnected infrastructure, which helped it quickly adapt to the changing customer preferences amid the coronavirus pandemic. The company’s overall comps grew 23.4%, with a 25% improvement in the United States.

In the reported quarter, comps were aided by a 10.1% rise in average ticket and a 12.3% increase in customer transactions. Moreover, sales per square foot rose 23.5%.

In dollar terms, gross profit increased 24.1% to $12,941 million from $10,432 million in the year-ago quarter, primarily driven by robust sales growth. Meanwhile, gross profit margin expanded 18 basis points (bps) to 34%.

Operating income increased 23.9% to $6,067 million, while operating margin expanded 6 bps to 15.94%. Despite gains from the robust top line and gross-margin growth, operating margin was partly offset by additional expenses to provide higher remunerations to staff to recognize their efforts amid the pandemic.

Balance Sheet and Cash Flow

Home Depot ended second-quarter fiscal 2020 with cash and cash equivalents of $14,139 million, long-term debt (excluding current maturities) of $32,370 million, and shareholders’ deficit of $414 million. In the first six months of fiscal 2020, it generated $14,829 million of net cash from operations.

In the first half of fiscal 2020, the company paid out cash dividends of $3,223 million and repurchased shares worth $791 million.

Concurrently, it declared the fiscal second-quarter dividend of $1.50 per share, which is payable Sep 17, 2020, to shareholders of record as of Sep 3.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 9.11% due to these changes.

VGM Scores

At this time, Home Depot has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Home Depot has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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