Why Home Depot Continues to Buck the Trend

Wide-moat

First, excellent merchandising has led to repeat business. Second, cyclical trends underlying the housing market, including prices, still low interest rates, and rising household formations and the headship rate, have lent support to ongoing spend in the category. And finally, the wealth effect remains bolstered by equity markets that remain around all-time highs, increasing consumers' willingness to spend.

In our opinion, the housing upswing could have legs through the end of the decade, given the demographic tailwinds the U.S. market is still encountering, and believe Home Depot will be a key beneficiary of these trends. We plan to raise our fair value estimate to around $155 from $130 as we incorporate our expectations for U.S. corporate tax reform (where the firm has 87% of its boxes) beginning in 2018, decreasing its federal statutory tax rate to 28% from 37%, which accounts for 80% of the increase. The remainder is from increasing our stage two EBI growth rate modestly to 5% from 4.4% to account for better potential profitability ahead.

The firm maintained its full-year outlook for 4.6% sales and comp growth and raised its earnings per share outlook to $7.15. This is versus our previous outlook that called for a sales rise of 4.7%, comp growth of 4.5%, and EPS of $7.15. Operating margins were about 40 basis points better than we had modeled in the first quarter; however, at 14% (the highest first-quarter performance over the last decade, at least), which points to an offset in slower operating expansion later in the year, as the company still expects 30 basis points of EBIT expansion in the current year (to 14.5%). Our long-term outlook remains unchanged, including comp growth of 3%-4% and modest leverage in both gross margin and SG&A, leading to operating margins that surpass 16% over the next decade.

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