Why Home Depot Earnings Are Not Pleasing to Investors

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Home Depot Inc. (NYSE: HD) reported third-quarter 2017 results before markets opened Tuesday. The home improvement store posted diluted net earnings per share of $1.84 in the quarter on revenues of $25.00 billion. In the same quarter last year, the company reported EPS of $1.60 and $23.15 billion in revenues. Consensus estimates for the most recent quarter had called for EPS of $1.82 and revenues of $24.55 billion.

Second-quarter same-store sales rose 7.9% worldwide and 7.7% in the United States. Those totals are better than the company’s same-store sales results in either the first or second quarter.

The company raised its sales guidance from a prior estimate for an increase of 5.3% year over year to an increase of 6.3%. Same-store sales guidance was raised from an increase of 5.5% to 6.5%. Home Depot also lifted diluted EPS guidance from a prior estimate of $7.29 to $7.36, up 14% including the impact of $8 billion in share buybacks for the 2017 fiscal year.

Gross margin for the quarter increased by 7.5% year over year, even though cost of sales rose 8.4%. Operating income of $3.68 billion was up 10.8% year over year, and net profit rose 10% to $2.17 billion.

CEO Craig Menear said:

Though this quarter was marked by an unprecedented number of natural disasters, including multiple hurricanes, wildfires in the West, and earthquakes in Mexico, the underlying health of our core business remains solid. I am proud of our team and suppliers for their extraordinary efforts to support those in the path of the various natural disasters throughout the quarter. Our support of the impacted communities continues.

Home Depot estimated that hurricane-related sales positively affected same-store sales growth by approximately $282 million in the quarter, although gross margin on these hurricane-related sales was considerably less than the company’s average. Home Depot also incurred approximately $104 million of hurricane-related expense in the quarter. As a result, operating profit was negatively affected by approximately $51 million.

Analysts have a consensus forecast for fourth-quarter EPS of $1.60 on sales of $23.43 billion. For the full year, analysts are looking from EPS of $7.34 and revenues of $99.97 billion.

Cash flow from operations rose by about $1.8 billion year over year to $9.74 billion. Home Depot repurchased $6.1 billion in stock and paid $3.17 billion in dividends for the quarter.

Another solid report, but not the blowout some investors must have expected given the modest uptick in premarket trading. As of Monday’s close, Home Depot shares have added 23.3% for the year to date and nearly 28% for the past 12 months.

The stock closed at $165.35 on Monday and traded up 0.1% to $165.90, in a 52-week range of $122.92 to $167.94. The 12-month consensus price target on the stock is $173.94.