Home Depot (NYSE: HD) is scheduled to report its fiscal third-quarter results on Tuesday, November 17. We expect the retailer to report strong Q3 results, beating the revenue and earnings expectations, benefiting from the stay-at-home bump. That said, the increase in remote working may be longer-lasting, which will allow the company to serve those customers looking to build and maintain a home office beyond the pandemic. The home improvement retailer has invested quickly and heavily to build out its digital capabilities to accommodate the demand surge during the pandemic, and these capabilities may bring in customers even after the pandemic has run its course. Certainly, sales will not continue to grow at 20% levels as seen in Q2 for long, but the company will likely continue to benefit from its ongoing One Home Depot
strategy going forward.

Our forecast indicates that Home Depot’s valuation is $285 a share, which is around 3% higher than the current market price of around $277. Look at our interactive dashboard analysis on Home Depot’s Pre-Earnings: What To Expect in Q3? for more details.

(1) Revenues expected to be in line with the consensus estimates

Trefis estimates Home Depot’s Q3 2020 revenues to be around $31.4 Bil, almost in line with the consensus estimate of $31.3 Bil. Home Depot has remained open as an essential retailer during the pandemic restrictions and has benefited from home improvement projects. In Q2 ended Aug 2, Home Depot reported revenue of $38 billion, an increase of 23% year-over-year, the retailer’s largest quarter of growth since 2002. The surge in sales helped grow net earnings to $4.3 billion in Q2, compared to $3.5 billion in the same quarter a year ago. In addition, the company also reported a comparable sales growth of 23.4%. This compares to full-year fiscal 2019 comparable sales growth of 3.5% and Q1 2020 comparable sales of 6.4%. In Q2, the retailer’s digital sales increased by approximately 100% with customers picking up 60% of those orders in-store. This indicated that the company is able to save major costs of shipping items to the customer’s homes in pick up orders, consequently passing these savings to its bottom line.

It should also be noted that Home Depot is in the midst of an $11 billion multiyear investment to upgrade its capabilities. The company is already benefiting by investing in technology within its stores to improve its supply chain and e-commerce shopping experience.

(2) EPS also likely to be ahead of consensus estimates

Home Depot’s Q3 2020 earnings per share expected to be $3.01 per Trefis analysis, marginally higher than the consensus estimate of $2.97. Over the previous two quarters combined, the company has paid a total of $1.3 billion in additional compensation. If the company can keep its labor expenses under control, it will likely be able to send a larger portion of its growing sales to the bottom line. In the most recent quarter, the company’s operating margin stood at 15.9%, which interestingly was lower than the previous year’s 16.1%, even though revenue grew substantially. However, overall operating income increased by 24% on a year-over-year basis.

For the full-year, we expect Home Depot’s net margin to grow slightly from 10.2% in 2019 to 10.5% in 2020. This coupled with a 12% y-o-y growth in revenues, could lead to a rise of $1.7 billion y-o-y in net income to $12.9 billion in 2020. All this, resulting in a possible EPS increase from $10.25 in 2019 to around $11.20 in 2020.

(3) Stock price estimate slightly higher than the current market price

Going by our Home Depot’s Valuation, with an EPS estimate of around $11.20 and P/E multiple of around 26x in fiscal 2020, this translates into a price of $285, which is marginally ahead of the current market price of $277.

In the upcoming Q3 results, investors will want to hear what management has to say about its progress on the $11 billion multi-year One Home Depot program to bolster digital capabilities.

Note: P/E Multiples are based on Share Price at the end of the year, and reported (or expected) Adjusted Earnings for the full year

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