Momentum Across Home Improvement Bolsters Home Depot
We're increasing our fair value estimate after the firm's strong sales growth.
We plan to raise our $217 per share fair value estimate for wide-moat Home Depot (HD) by a mid-single-digit rate after incorporating robust first-quarter sales growth of 33% (to $37.5 billion), which outpaced our estimate by $4 billion. Strength came from same-store sales that rose a whopping 31% (on top of a 6.4% rise a year ago), while orange box (ex-MRO) performance was also stout, with average ticket rising 10%, customer transactions higher by 19%, and sales per square foot up 30% as consumers embarked on big ticket projects. More impressive was the profitability Home Depot captured on its rising scale, delivering a 15.4% operating margin (up 380 basis points), despite commodity headwinds. And the firm continues to capture market share, with its top line outpacing building material and garden equipment and supplies industry growth that averaged 25% (seasonally adjusted, U.S. Census) in February-April.
As the firm moves ahead, it is set to lap above-20% same-store sales growth in the final three quarters of 2021, potentially challenging its ability to capture sustainable positive sales performance over the near term. However, top-line stability could stem from HD’s tie up with HD Supply, which we had forecast to generate $3 billion in sales during 2021 pre-acquisition. Since the beginning of May, Home Depot is tracking above 30% two-year stacked comps, but the firm was hesitant to offer an update to its 2021 same-store sales or profit outlook given the opacity caused by COVID-19 and stimulus-related demand. In February, Home Depot had set an initial 2021 forecast calling for flat to slightly positive same-store sales growth and above 14% operating margin (if existing trend patterns persisted). Even with modest operating margin contraction (50-100 basis points) in the back half of 2021, an operating margin above 14% should be easily achieved. We don’t plan to alter our long-term outlook for Home Depot, which includes 3.5% sales growth and above 15% operating margins.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.