The analysts Were Getting Bullish On Home Depot…
The analysts were getting a little bit bullish on Home Depot (NYSE: HD) going into the second-quarter report but those hopes were dashed. Analysts at Morgan Stanley, Evercore ISI, and Raymond James all came out with positive commentary just a day before the release and, ironically, one of them at least even made note of Home Depot's biggest problem. Home Depot is one of the biggest winners of the pandemic, it was spurred by stay-at-home trends and stimulus money which is quickly dissipating. Home Depot is still a great company, it still has great cash flow, and the dividend is sound but it may be time to trim your Holdings in favor of something with a better growth outlook. This stock Is facing a "massive 2-year comparable sales deceleration" and that could cap gains for the foreseeable future.
Home Depot's Tailwinds Are Weakening
Home Depot had a good report but there is one factor within it that has shares moving lower. While Revenue growth is positive and exceeded expectations internal metrics reveal revenue acceleration is slowing, weaker than expected, and the comps are only going to get tougher. The company reported $41.12 in net revenue for a gain of 8.1% over last year which is good. That beat the consensus by 380 million dollars or about 90 basis points which is also good but not enough to get excited about. The really damaging figures are the comp store numbers, however, which show the company's quarterly growth is more to do with stores added over the past year than strengths of sales.
On a comp-store basis, the company reports sales are up 4.5% over last year versus the expectation for 5.6%. Worse, comps in the US came in at 3.4% versus the expectation for nearly 5% growth. Comp sales were impacted by a 5.8% decline in store traffic offset by an 11.3% increase in ticket average which itself isn't that impressive. Inflation has the price of everything moving higher so it's not like Home Depot customers are buying much more product, they're just spending more money. The company did not add any new stores this quarter.
Moving down to the earnings, the news is a little better. The company reported mixed margin improvement but GAAP earnings that came in ahead of the consensus. The $4.53 in GAAP earnings beat the consensus by $0.11 due to a 20 basis point improvement in operating margin and revenue strength. The key takeaway for us is that margin and earnings could have been stronger. The company increased its inventory by 40.1% which cut into the bottom line. That is worth nearly $5.40 billion or more than 100% of the company's GAAP earnings.
Home Depot Pays A Good Dividend, It's Going To Get Better
Home Depot pays an attractive dividend and one that we view as safe and with a high expectation for distribution growth. At the current share price the stock is yielding about 2%, the company is paying out only 40% of earnings, there's a history of past increases, and the most recent increases have been double digits. Based on the metrics, we're expecting to see Home Depot increase its dividend by double-digits again this year but there is something else to consider. If share prices continue their downward plunge the distribution will not only grow but the yield on new investment dollars may become significantly better.
The Technical Outlook: Home Depot Could Fall Another 5% Or More
Shares of Home Depot are down nearly 5% in early market action and could head even lower. Early support appears to be near the $320 level but if this level is broken, we see this stock moving down to the $300 level. The $300 level is the last level of firm support tested by the market and one that we view as potentially very strong. If price action is not able to regroup at this level, down more than 10% from the high, Home Depot could be in for a much bigger decline.
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