Home Depot Posts Solid Operating Results

While same-store sales fell below the 5% we had modeled, at just 3.6% for wide-moat Home Depot HD, the company was able to defend its cost structure, delivering a 14.5% operating margin, just 10 basis points shy of our estimate. Idiosyncratic factors acted as a drag on comp performance in the quarter, with the timing of a Black Friday event shift hindering October’s comp performance by 100 basis points and lumber deflation contributing a more than 65-basis-point headwind throughout the period. With revised full-year guidance calling for sales growth of 1.8%, comps of 3.5%, and earnings per share of $10.03 (versus 2.3%, 4%, and $10.03, respectively, prior), we don’t plan any material change to our $170 fair value estimate and view shares as rich, trading at 21 times our 2020 estimate, despite the 5% decline in shares on the news. For reference, our model had forecast about 2.5% sales growth and $10.11 in EPS prior to the third-quarter print.

Despite investor disappointment that investments weren’t immediately paying off, we heard a plethora of data points supporting still robust underlying demand at Home Depot. Online sales continue to fare well, rising 22% in the third quarter, with more than 50% of orders picked up in stores, indicating the boxes continue to resonate with end users. Both comp ticket and transaction rose 1.8%, with big ticket comp transactions rising 4.8%. The ongoing innovation and low everyday pricing should permit Home Depot to continue to capture 3%-plus comps over our 10-year forecast, which in turn should result in modest expense leverage, helping operating margin performance climb to 16% in our terminal year. However, we expect to hear updated 2020 and beyond goals at the company’s investor day on Dec. 11 and foresee elevated spend on technology and merchandising initiatives as ongoing to protect the firm’s brand intangible asset, which could keep operating margins below 15% until fiscal 2023.

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