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Home Depot (HD) Up Over 40% YTD: Will the Rally Continue?

The Home Depot Inc. HD has been gaining from robust earnings trend, disciplined capital allocation, growth of pro-category, steady housing market recovery and strong consumer demand. This has helped the company’s stock surge 41.5% year to date, outperforming the industry’s 35.6% growth.

 

 

Additionally, this Zacks Rank #3 (Hold) stock boasts a VGM Score of B and a long-term earnings growth rate of 13.4%. Let’s delve into the other factors which are driving the stock.

Robust Earnings Trend & Outlook Drive Estimates

The company’s both top and bottom lines grew year over year and topped estimates in third-quarter fiscal 2017. While sales marked fifth straight beat, earnings retained its five-year long trend of positive surprises. Results gained from strength in the company’s core business, continued focus on introducing innovative products, boosting interconnected customer experience and driving productivity. Further, the company continued to reap the benefits of a steady housing market recovery and strong customer demand.

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Backed by solid year-to-date performance, strength of its core business and estimated gains from hurricane recovery activities, the company raised fiscal 2017 sales and earnings guidance. Consequently, the company’s estimates witnessed an uptrend in the last 30 days. The Zacks Consensus Estimate for the fourth quarter and fiscal 2017 moved up by 1 cent each to $1.62 and $7.37, respectively.

Merchandising Efforts & Focus on Pro-Customers

Home Depot is gaining from consistent focus on improving customer experience and solid execution, retaining its leading position in the home improvement industry. The company has been revamping itself by concentrating on square footage growth and maximizing productivity from its existing stores. Further, the company remains focused on developing merchandising tools and increasing investment in e-commerce to boost the top line and enhance market share.

The company has also been gaining from its focus on Professional Customers or Pro-Customers and has undertaken several strides in this regard, like the acquisition of Compact Power Equipment. Prior to this, the company invested in Interline brands and maintenance, repair and operations products, which are generating impressive results.

Building Interconnected Capabilities

In response to the changing customer preferences, Home Depot has been building its interconnected capabilities to establish sync between physical and digital stores. For this, the company redesigned its website with enhanced features for better search and faster checkout, upgraded mobile app, and addition of the estimated time of arrival feature.

Further, the company improved fulfillment options by launching its customer order management system and the Buy Online Deliver From Store capability. These initiatives led online sales to improve nearly 19% in third-quarter fiscal 2017, representing 6.2% of total sales. We believe that these initiatives will drive the company’s top- and bottom-line growth in the long run.

Deterrents on Home Depot’s Growth Trajectory

Despite such positives, Home Depot continues to be plagued by strained gross margin over the past few quarters. While hurricane-related activities aided comps growth, gross margins on such sales were significantly below the company’s average. Evidently, the company’s gross margin contracted 10 basis points (bps) in third-quarter fiscal 2017. Prior to this, the company’s gross margin declined 6 bps in the preceding quarter, and 10 bps each in first-quarter fiscal 2017 and fourth-quarter fiscal 2016. Moreover, management expects gross margin to decline about 12 bps from last year in fiscal 2017.

Do Retail-Wholesale Stocks Grab Your Attention? Check These

Investors interested in the same sector may consider Beacon Roofing Supply Inc. BECN, Fastenal Company FAST and Canada Goose Holdings Inc. GOOS. While Beacon Roofing sports a Zacks Rank #1 (Strong Buy), Fastenal and Canada Goose carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Beacon Roofing delivered an average positive earnings surprise of 6.4% in the trailing four quarters. It has a long-term earnings growth rate of 25%.

Fastenal has an average positive earnings surprise of 2.3% in the trailing four quarters. It has a long-term earnings growth rate of 14%.

Canada Goose delivered an average positive earnings surprise of 32.4% in the trailing four quarters. It has a long-term earnings growth rate of 35.8%.

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Home Depot, Inc. (The) (HD) : Free Stock Analysis Report
 
Fastenal Company (FAST) : Free Stock Analysis Report
 
Beacon Roofing Supply, Inc. (BECN) : Free Stock Analysis Report
 
Canada Goose Holdings Inc. (GOOS) : Free Stock Analysis Report
 
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