Home Depot Benefits From Robust Sales Growth

We plan to raise our $184 fair value estimate for wide-moat Home Depot by a high-single-digit rate after the second quarter, as sales outperformance lifts our intrinsic value. During the second quarter, Home Depot posted a whopping 23.4% same-store sales result, leading to sales of $38 billion in the period (handily above the $33 billion we had forecast). More impressive was Home Depot’s ability to leverage expenses, leading to a flattish year-over-year operating margin performance of 15.9%, despite digesting an additional $480 million in COVID-19-related costs. As category demand has remained healthy, we expect to lift our back-half comp estimates, which average 3.5% in our forecast, as sales should remain robust as a result of consumers continuing to spend more time at home. While no guidance has been offered for the remainder of the year, the inclusion of second-quarter results and modestly higher same-store sales ahead would lift 2020 sales to more than $120 billion (marking a double-digit rise despite an ongoing global pandemic) and earnings per share to more than $11 (high-single-digit growth).

Management commentary that “through the first two weeks of August, comparable sales growth remains at levels similar to total company's second-quarter comp sales” indicate gains should persist in Home Depot’s third quarter. However, while 2020 should shape up to be a record-breaking year on the sales and profit front, we expect 2021 will trend toward more normalized performance, returning to single-digit sales and comp growth along with mid-teens operating margin profitability. As such, we don’t plan to alter our long-term outlook, which includes average same-store sales growth of 3%-4% and modest operating gains annually resulting in 16% terminal operating margin performance (from 14.4% in 2019). At this time, we view shares as rich, trading at more than 25 times our 2021 EPS estimate.

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