Home Depot's Growth Contingent on COVID-19 Behaviors

Home Depot HD reported banner performance, banking 25% comp and sales growth in its fiscal fourth quarter. The print offered above-22% comps for all three months and balanced comp improvement, with ticket rising 10.8% and transactions up 12.6%. The firm continues to take share of the building materials and garden supply industry, which grew at a high-teens pace over the same period, indicating merchandising success at Home Depot, and supporting our wide-moat rating. However, costs rose faster than expected, leading to an operating margin decline of 50 basis points, to 12.7%, hurt by a plethora of exacerbated costs across the cost of goods sold and the operating expense lines (mix, shrink, logistics, COVID-19 spend). We believe some of these headwinds could persist in the year ahead. As such, while we plan to raise our $210 per share fair value estimate by a mid-single-digit rate, we still view shares as rich even after declining post report.

The company noted that if the demand cadence that was captured late in 2020 continued through 2021, Home Depot would likely see flat to slightly positive comp sales growth and an operating margin of more than 14%. While the full-year 2021 comp outlook is lower than our mid-single-digit forecast, the operating margin is better than the roughly 13.5% we estimated, and as such, we don’t plan much change to our $12.36 2021 EPS estimate. However, given the still strong read on first-quarter demand, we believe this implies negative comp potential over the latter three quarters of 2021 as COVID-19-related demand recedes (assuming the vaccine is largely rolled out nationally in the first half). The Feb. 23 update doesn’t offer us any impetus to alter our long-term outlook that calls for 3% comp and 4% sales growth (on average) along with operating margins that normalize around 15% over the next decade, as long-term operating margin gains are bound by strategic investments to keep Home Depot the most-favored home improvement retailer.

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