Why HD Supply Was Pummeled After Earnings Report

Industrial distributor HD Supply Holdings Inc. (NYSE: HDS) reported second-quarter fiscal 2016 results before markets opened Wednesday. The company posted adjusted diluted earnings per share (EPS) of $0.85 and $2.02 billion in revenues. In the same period a year ago, the company reported adjusted EPS of $0.56 on revenue of $1.94 billion. Second-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.88 and $2.03 billion in revenue.

On a GAAP basis, second-quarter EPS came in at $0.49 per share, compared with EPS a year ago of $0.55. Income from continuing operations was essentially flat with the second quarter of last year, and adjusted net income benefited from an income tax benefit of $66 million, compared with $12 million a year ago, and a restructuring charge of $5 million.

The company modified its estimate for full-year sales growth in excess of estimated market growth from a previous estimate of 3% to a new estimate of flat to up 3%. For the third quarter, HD Supply expects revenues of $1.99 to $2.04 billion and adjusted EPS of $0.77 to $0.82.

Analysts have a full-year EPS estimate of $2.72 and sales of $7.54 billion. For the third quarter, analysts are looking for EPS of $0.91 and revenues of $2.06 billion.

In the first six months of HD Supply’s 2016 fiscal year, the company has posted adjusted EPS of $1.36. If the company meets the top of its own EPS estimate, its total for the fiscal year through three quarters will be $2.18, with a typically low fourth quarter coming up. In the fourth quarter of 2015, adjusted EPS came in at $0.27. The company would have to double that to meet the current consensus projection. Add the top and bottom line misses for the second quarter and it’s no surprise to see the stock punished Wednesday morning.

Chairman and CEO Joe DeAngelo said:

We delivered solid growth, operating leverage and cash conversion in the quarter while simultaneously investing in long-term productivity and growth. We intend to continuously invest to ensure our customer experience is exceptional and to extend and evolve our leading market positions.

Shares closed down 1.4% on Tuesday, at $36.26 in a 52-week range of $21.26 to $36.99, and dropped nearly 10% in Wednesday’s premarket. Thomson Reuters had a consensus 12-month price target of $40.86 before results were announced.