Home Depot’s Sales Surge from Housing Tailwinds

Comparable store sales were up 5.8% during Q4 FY16 due to new home constructions

Home improvement retailer Home Depot Inc. (NYSE: HD) announced its Q4 FY16 and full-year FY16 financial results on February 21st, 2017.

The Atlanta, Georgia-based company sells building materials, home improvement products, and lawn and garden products, and provides various services. The Home Depot stores have an average enclosed space of approximately 104,000 square feet and over 24,000 additional square feet of garden area.

The Home Depot stores serve three primary customer groups: do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers and professional customers. The Company operated a total of 2,278 stores in the US, District of Columbia, Puerto Rico, US Virgin Islands, Guam, 10 Canadian provinces and Mexico. The Company employs more than 400,000 associates. Read more about Home Depot’s financial results below.

Q4 FY16 financial highlights

Home Depot reported strong Q4 FY16 sales, supported by a number of economic tailwinds such as low unemployment, steady job growth, and higher wages, which in turn has enabled consumers to channel funds to new house constructions as well as home improvement projects. The home improvement chain has also benefited from a stronger economy and rising home values, a harbinger of better sales for building materials, home improvement products, and services.

Home Depot’s Q4 FY16 sales grew 5.8% to $22.2 billion versus the prior year’s same period. Comparable store sales for Q4 FY16 were positive 5.8%, and comp sales for US stores were positive 6.3%.

During the reporting quarter, growth came from an even mix of customer traffic gains and higher average spending per visit, although Home Depot’s traffic growth did slow to a 2.9% pace for the year from 4% in 2015. Ecommerce sales rose at a 19% pace, marking an acceleration from the prior quarter’s 17% increase. Home Depot has successfully integrated ecommerce into its retailing strategy. Digital sales now represent roughly 6% of the business, and nearly half of those orders involve a customer trip to a physical store location.

During Q4 FY16, gross profit grew 5.5% to $7.55 billion, while gross profit margin ticked down to 34% of sales from 34.1% a year ago. Home Depot kept a lid on expenses, and operating income jumped 14.8% to nearly $3 billion. As a result, net earnings rose 18.6% to $1.74 billion, or $1.44 per diluted share, compared to $1.47 billion, or $1.17 per diluted share, in the year ago comparable period.

FY16 financial highlights

During FY16, Home Depot’s sales grew a robust 6.9% to $94.6 billion versus the prior year. Total company comparable store sales grew 5.6%, and comp sales for US stores were positive 6.2% for the year. Net earnings rose 13.5% to $7.95 billion, or $6.45 per diluted share, compared to $7.00 billion, or $5.46 per diluted share, in the year ago corresponding period.

Advance estimates released by the Bureau of Economic Analysis (BEA) on Friday, January 27th, 2017, showed that residential investment grew at a 10.2% annual rate in Q4 FY16 after two straight quarters of decline. However, in 2016, real household outlays climbed 2.7%, the least in three years. Investment in non-residential structures fell 5% in Q4 FY16 after rising 12% in the prior period. The gains in both consumer and business spending resulted in a measure of private domestic demand rising at a brisk 2.8%, up from the 2.4% pace notched in Q3 FY16. This in turn bodes well for the company in the coming months.

Other highlights

Store update: At the end of Q4 FY16, the Company operated a total of 2,278 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico.

Dividend: The Company’s targeted dividend payout ratio will be increased from 50% to 55% of net earnings. The board of directors declared a 29% increase in the quarterly dividend to $0.89 per share. The dividend is payable on March 23rd, 2017, to shareholders of record on the close of business on March 09th, 2017. This is the 120th consecutive quarter the Company has paid a cash dividend.

Share repurchase: The board of directors has authorized a $15 billion share repurchase program, replacing its previous authorization. Since 2002 and through January 29th, 2017, the Company has returned more than $67 billion of cash to shareholders through repurchases, repurchasing approximately 1.3 billion shares.

Guidance for FY17

Based on current industry trends, Home Depot forecast sales growth of 4.6% in 2017, which is consistent with management’s goal of passing $100 billion of annual revenue by 2018. Comparable store sales are expected to grow by approximately 4.6% during the year. Home Depot is targeting to open six new stores. Gross margin is forecast to decrease by approximately 15 basis points, while operating margin is forecast to expand approximately 30 basis points. Diluted EPS is predicted at $7.13 after share repurchases of approximately $5.0 billion.

Home Depot forecasts capital spending of approximately $2.0 billion with cash flow from the business of approximately $11.3 billion.

Stock Performance

Home Depot’s stock ended the day at $145.30, slipping 0.45%, at the close on Monday, February 27th, 2017, having vacillated between an intraday high of $146.01 and a low of $144.80 during the session. The stock’s trading volume was at 4,381,687 for the day. The Company’s market cap was at $175.49 billion as of Monday’s close.

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