HD: Earnings Report for the Quarter Ending January 31, 2021

Home Depot reported before the market opened on February 23, 2021, it earned $2.65 per diluted share in the quarter that ended on January 31, 2021, up 16 percent from earnings of $2.28 in the equivalent 13 of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

This post compares the quarterly Income Statement published by Home Depot to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Home Depot's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  Home Depot operates about 2300 big-box home improvement stores in the U.S., Canada, and Mexico that cater both to professionals and do-it-yourself homeowners.  The COVID-19 pandemic, in some ways, benefited Home Depot as house-bound consumers started more renovation projects. However, the pandemic also led to increased labor and cleaning costs and supply chain challenges.  In December 2020, Home Depot acquired HD Supply Holdings, a former subsidiary, for $8 billion.  HD Supply distributes maintenance, repair and operations (MRO) products for use in multi-family and hospitality buildings.

The following table is a simplified version of Home Depot's Income Statement for the quarter that ended in January 2021, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided to facilitate comparisons.

Revenue in the January 2021 quarter totaled $32.3 billion, 25 percent more than last year. I was expecting Home Depot to report revenue of $31.0 billion for the January 2021 quarter.  The actual amount surpassed my estimate by $1.3 billion (4.1 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $21.4 billion in the latest quarter, which translates into a Gross Margin of 33.6 percent of revenue. Since it was lower than the 33.9 percent Gross Margin achieved in the year-earlier quarter, it's a sign that Home Depot sold its products and services at less profitable prices relative to production costs. I was expecting the Gross Margin to be 34.0 percent in the January 2021 quarter, and Home Depot missed that prediction by 0.4 percent.

Sales, General, and Administrative expenses totaled $6.2 billion in the January 2021 quarter, up 28.5 percent from one year ago.  SG&A expenses increased from 18.7 percent to 19.2 percent of quarterly revenue, which shows Home Depot spent more per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 18.7 percent of revenue, and the actual percentage turned out to be higher than the prediction.

Home Depot's Operating Income was $4.1 billion in the quarter, up 20.0 percent from the year-earlier period.  Operating Income fell short of my $4.2 billion estimate by $130 million.

Interest and other non-operating items summed to a net expense of $327 million.  My estimate for non-operating items was $328 million.

The effective income tax rate rose by 3.7 percent to 23.9 percent, which had a negative effect on net income.  I expected the tax rate to be 24.3 percent.

Net income attributable to Home Depot was $2.86 billion, $2.65 per share in the quarter ending January 2021.  The figures for the year-earlier quarter were $2.5 billion, $2.28/share. My earnings estimate for  the latest quarter was $2.94 billion ($2.72/share), so Home Depot earned $0.07 per share less than I had expected.

In conclusion, the following list shows where the reported results differed from my expectations:

      – Better than expected:  Revenue growth 

      – Worse than expected:  Depreciation + SG&A + SG&A/Revenue 

      – Met or close to expectations:  Gross Margin + Misc non-operating items + Interest + Income tax rate 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #homedepot    #hd    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

HD: Look Ahead to January Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Home Depot's earnings for fiscal year 2020's fourth quarter, which ended on January 31, 2021, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about Home Depot.

Home Depot operates about 2300 big-box home improvement stores in the U.S., Canada, and Mexico that cater both to professionals and do-it-yourself homeowners.  The COVID-19 pandemic, in some ways, benefited Home Depot as house-bound consumers started more renovation projects. However, the pandemic also led to increased labor and cleaning costs and supply chain challenges.  In December 2020, Home Depot acquired HD Supply Holdings, a former subsidiary, for $8 billion.  HD Supply distributes maintenance, repair and operations (MRO) products for use in multi-family and hospitality buildings.

Shares of Home Depot now trade for about $277 each, giving the company a market value of $299 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

Home Depot recorded profits of $12 billion on revenue of $126 billion during the last year. In the quarter that ended on November 1, 2020, Home Depot earned $3.18 per share, which  beat the $3.05 Wall Street consensus forecast. 

Revenue in the November 2020 quarter totaled $33.5 billion, 23 percent more than last year.  The Building Materials business was responsible for 38 percent of overall revenue, and this unit's revenue grew by 22.3 percent compared to the year-earlier result.  The Décor business contributed 33 percent of revenue, and this unit's revenue increased by 19.5 percent.  The Hardlines unit supplied 29 percent of revenue, and this business's revenue rose by 29.0 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Home Depot did not provide any guidance about the fourth quarter when the company reported results last November.  I have had to rely on historical trends and national economic data to estimate the company's earnings.

The Census Bureau publishes data on U.S. Retail Sales, include data specific to Retail Sales: Building Materials, Garden Equipment and Supplies Dealers , which correlate fairly well to Home Depot's reported Revenue.  In November 2020, the index was up 16 percent when compared to the same month in 2019.  The final figures aren't yet available for December, but the advance number for the month was a stellar 22 percent than the year-earlier figure.  If Home Depot's Revenue were to increase at 19 percent (i.e., halfway between 16 and 22 percent) in the fourth quarter, the figure would be 1.19*$25.8 billion =  $30.7 billion.  For my Revenue estimate, I'm bumping this figure up to $31.0 billion to account for one month of HD Supply's sales.

Home Depot's Gross Margin is normally very close to 34 percent of Revenue, and will probably be so again in the fourth quarter.  This would translate into a Cost of Good Sold of (1-0.34)*$31.0 billion =$20.5 billion.

The Depreciation expense was $528 million in the third quarter, and I'm expecting a similar amount the fourth quarter.

In recent years, Sales, General, and Administrative (SG&A) expenses have been right around 18.7 percent of Revenue in the fourth quarter.  The SG&A estimate is 0.187*$31.0 billion =$5.8 billion.

The numbers above combine to produces an estimate for Operating Income of $4.2 billion, which is 24 percent higher than the equivalent quantity in the year-earlier quarter.

For non-operating gains and losses, I've selected figures similar to those reported in the first three quarters of the fiscal year.   

I assumed 24.3 percent for the effective income tax rate, which is similar to the rate in previous quarters for Home Depot.

With these figures, the estimate for Net Income (GAAP) in the quarter is $2.94 billion ($2.72 per share).  

I did not make any explicit provisions for acquisition transaction or financing costs.  I don't expect them to be significant.

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#homedepot  #hd  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

Home Depot: Gauge Analysis (updated November 24, 2020)

I have analyzed Home Depot's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation of the Overall Score has been designed to favor companies that exhibit good value characteristics over fast growing firms that are expensive.  An Overall Score above 60 isn't easy to achieve, and it signifies that the company has enough value-investment appeal to be worth examining in more detail. 

First, a quick review of the company itself.

Home Depot operates about 2300 big-box home improvement stores in the U.S., Canada, and Mexico that cater both to professionals and do-it-yourself homeowners.  Recognizing the value of its employees during the COVID-19 pandemic, Home Depot hiked their pay and benefits.  In November 2020, Home Depot announced a deal to acquire HD Supply Holdings, a former subsidiary, for $8 billion.  HD Supply distributes maintenance, repair and operations (MRO) products for use in multi-family and hospitality buildings.

Home Depot recorded profits of $12 billion on revenue of $126 billion during the last year. In the quarter that ended on 1 November 2020, Home Depot earned $3.18 per share, which missed the $3.68 Wall Street consensus forecast. See https://tinyurl.com/yxqu3gxd for Home Depot's most recent quarterly report.

Shares of Home Depot now trade for about $271 each.  These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

Home Depot's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $292.6 billion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.4 (>2.0 is conservative)

    Long-term debt/Working Capital = 360% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = N/A (negligible)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 16% (good)

    Owner Earnings growth rate (five-year average) = 12% (good)

    Free Cash Flow growth rate (trailing year) = 62% (terrific)

    Free Cash Flow growth rate (five-year average) = 18% (good)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 63% (excellent)

    Operating Profit/Sales = 14.0% (good)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 22% (very good)

    Dividend = 36% of last year's FCF (easily sustainable with room to grow)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 22.8 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 30.7 (expensive)

    Free Cash Flow/Market Value = 6.2% (appealing, more than the five-year average of 5.0%)

    Acquirer's Multiple = 17.8 (expensive)

    Price/Book Value = 100.0 (more expensive than the five-year average of 62.9)

    Price/Sales = 2.3 (more expensive than the five-year average of 2.0)

In summary, the analysis assigned Home Depot five GREEN, zero YELLOW, and two RED grades.  The resulting Overall Score is 54 of the 100 possible points, which is not high enough.  The score is below the 60-point threshold, and, therefore, Home Depot does not qualify at this time for more in-in-depth consideration.

The share price would theoretically have to fall by 13.1%, from $271.41 to $235.87, all else being equal, to lift the Overall score to the 60-point threshold.  Of course, sustained improvements to the company's financial performance is the best way to raise the Overall Score. Check this blog occasionally for updates on how Home Depot's score actually changes in response to new data.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to perform verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #homedepot    #hd    #gauges  #gcfr  #gcfr2 #valueinvesting   #financialanalysis