Home Depot (HD) Down 22.8% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Home Depot (NYSE:HD). Shares have lost about 22.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Home Depot due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Home Depot Surpasses Q4 Earnings and Sales Estimates

Home Depot has posted fourth-quarter fiscal 2019, wherein earnings and sales beat the Zacks Consensus Estimate. However, the company’s top line declined on a year-over-year basis, while earnings improved. It also provided a solid view for fiscal 2020.

Q4 Highlights

Earnings of $2.28 per share grew 9.1% from $2.09 registered in the year-ago quarter. The bottom line also surpassed the Zacks Consensus Estimate of $2.10. Results were partly offset by an extra week of operation in the fourth quarter of fiscal 2018 compared with the reported quarter, which added 21 cents to earnings per share in the fourth quarter of fiscal 2018.

Net sales declined 2.7% to $25,782 million from $26,491 million in the year-ago quarter but beat the Zacks Consensus Estimate of $25,747 million. The sales decline is attributed to one extra week in the fourth quarter of fiscal 2018, which contributed incremental sales of $1.7 billion. The company's overall comps grew 5.2%, with a 5.3% improvement in the United States.

In the reported quarter, comps were aided by 4.1% rise in average ticket, offset by a 6.4% decline in customer transactions. Moreover, sales per square foot rose 2.8%.

In dollar terms, gross profit declined 3.2% to $8,736 million from $9,027 million in the year-ago quarter, primarily driven by soft sales. Further, gross profit margin contracted 20 basis points (bps) to 33.9%.

Operating income rose 0.7% to $3,403 million, while operating margin expanded 40 bps to 13.2%. Despite a decline in gross margin, operating margin benefited from a decrease in SG&A expenses.

Balance Sheet and Cash Flow

Home Depot ended fiscal 2019 with cash and cash equivalents of $2,133 million, long-term debt (excluding current maturities) of $28,670 million, and shareholders' deficit of $3,116 million. In fiscal 2019, it generated $13,723 million of net cash from operations.

In fiscal 2019, the company paid out cash dividends of $5,958 million and repurchased shares worth $6,965 million.

Moreover, it hiked its quarterly dividend by 10% to $1.50 per share, which indicates an annualized dividend of $6.00 per share. The raised dividend is payable Mar 26, 2020, to shareholders of record as of Mar 12.

Outlook

The company noted that fiscal 2019 was a year of significant progress on its One Home Depot investment plan. Home Depot is in the second year of the aforementioned plan. Through the two years, the company increased sales by more than $9 million.

Backed by the progress on the One Home Depot investments, it provided a strong view for fiscal 2020. It expects sales growth of 3.5-4% for fiscal 2020, with comps growth of 14%.

Moreover, the company expects operating margin of 14% and net interest expenses of $1.2 billion for fiscal 2020. Effective tax rate is anticipated to be 24%. For fiscal 2020, the company projects earnings per share of $10.45, suggesting 2% growth from the reported in fiscal 2019.

Additionally, it plans to open six stores in fiscal 2020. It expects to repurchase shares worth at least $5 billion. Capital expenditure is likely to be $2.8 billion, with depreciation and amortization expenses of $2.4 billion. Moreover, the company expects cash flow from operating activities of $13.5 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

At this time, Home Depot has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Home Depot has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.