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Home Depot Q4 profit tops analyst estimates

Home Depot trolley

Home Depot Inc. posted fourth-quarter profit that topped analysts’ estimates as improved customer service and online operations helped it take advantage of a surge in renovation spending.

Profit excluding some items was $1 a share in the three months through Feb. 1, the Atlanta-based company said Tuesday in a statement. The average of 25 analysts’ estimates compiled by Bloomberg was 89 cents. The earnings beat was the biggest on a percentage basis in three years.

The largest U.S. home-improvement retailer has freed up more employees to work on the sales floor, helping it make the most of a flood of shoppers seeking to improve their properties. The chain, which has been led by Chief Executive Officer Craig Menear since November, also has invested in new distribution centers and inventory systems to keep stores better stocked.

“The company is operating as well as can be expected, and execution is strong,” David Strasser, an analyst Janney Montgomery Scott LLC in New York, said in a note. Sales were boosted by purchases of lumber, tools and appliances, which the company has been providing more space, he said.

Revenue rose 8.3 percent to $19.2 billion, topping analysts’ $18.7 billion average projection. Same-store sales, a closely watched metric because only established stores are counted, rose 7.9 percent for the best performance in six quarters. Analysts projected a 5.5 percent gain.
Appliance Sales

Bigger-than-expected gains in categories like appliances, tools and water heaters helped boost sales more than the company forecast, Chief Financial Officer Carol Tome said in an interview.

The chain also saw revenue from professional homebuilders and contractors grow faster than companywide sales. That helped boost purchases of more than $900 by about 10 percent.

The retailer also announced plans to return cash to shareholders. The board approved an $18 billion stock buyback program, replacing its previous authorization, and increased the quarterly dividend 26 percent to 59 cents a share. The company plans to buy back about $4.5 billion in stock in its current fiscal year.

Home Depot rose 4 percent to $116.75 at the close in New York for the biggest gain in six months. Lowe’s Cos. also advanced, with the shares climbing 1.2 percent to $74.65. The second-largest U.S. home-improvement chain reports fourth-quarter results tomorrow.
Currency Headwinds

Home Depot said profit per share this year will be $5.11 to $5.17 after expected stock repurchases. Analysts estimated $5.23, on average. Currency exchange rates would reduce sales growth by about $1 billion and earnings per share by about 6 cents if they stay where they are today, the company said.

Comparable-store sales will gain as much as 4.5 percent this year, the company said. The chain expects continued improvement in the housing market to account for 1.5 percentage points of the gain. That’s a reduction from the lift of 2 percentage points the company included in last year’s forecast because it expects price gains to slow, Tome said.

Fourth-quarter net income rose 36 percent to $1.38 billion, or $1.05 a share.
Price Growth

Home-price growth sped up in much of the U.S. in the fourth quarter as low mortgage rates and the improving job market spurred demand. The median price of an existing single-family home rose from a year earlier in 86 percent of the 175 metropolitan areas measured, the National Association of Realtors said in Feb. 11 report. Twenty-four areas had price gains of 10 percent or more, up from 16 regions in the third quarter.

Still, those price gains and a dwindling supply of homes for sale are making it more difficult for first-time and younger buyers to get into the market. Fewer home sales means decreased demand for paint and other supplies that buyers typically purchase to put their own touches on a new house.

Another potential headwind for housing may come from the Federal Reserve, which is expected to begin raising interest rates this year, a move that will increase potential homebuyers’ borrowing costs. The average rate on a 30-year fixed mortgage rose to 3.76 percent in the week ended Feb. 19 from 3.69 the week before, according to data from Freddie Mac in McLean, Virginia. The rate reached 3.31 percent in November 2012, the lowest in data going back to 1971.

‘Principle Drivers’

Home Depot, for its part, still sees the economy and the housing market benefiting results.

“Overall GDP growth and a continued tailwind from the housing recovery will be the principle drivers of growth for our business,” Menear said on the call.

Menear, a longtime Home Depot executive, replaced retiring CEO Frank Blake in November. Blake led the company out of the recession and shifted its focus from opening new stores to boosting the performance of current locations and online operations. The strategy has proven prescient as many retailers are closing stores or making them smaller as people do more shopping online.

Unlike most retailers, the Christmas shopping season isn’t typically the most lucrative quarter for Home Depot. That comes in the spring, when warmer weather spurs people to fix up the interior and exterior of their properties. For several years the chain has done a spring sales event dubbed “Black Friday,” a staple of marketing during the holidays.

However, the company also turned in a strong performance on the real Black Friday last year, posting the biggest sales day in company history, executives said on the call.

Source : Matt Townsend - Bloomberg
http://www.bloomberg.com/news/articles/2015-02-24/home-depot-profit-tops-estimates-as-housing-market-aids-spending

 

25 February 2015

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