Home Depot’s Profitability Could Continue to Expand in 3Q16

3Q16 Earnings Preview: Can Home Depot Beat Market Expectations?

(Continued from Prior Part)

Home Depot’s margins expand in 1H16

Home Depot (HD) has seen its profitability rise over the course of fiscal 2016. Its gross and operating profit margins expanded by about six basis points and 50 basis points, respectively, in 1H16—compared to 1H15.

The rise in the profitability was due to strong same-store sales trends, as we discussed in the last part. The company also benefited from ongoing initiatives to boost its productivity and supply chain, lower energy costs, and lower shrink. These margin enhancers were partially offset by costs relating to Home Depot’s data breach.

Comparative performance

Lowe’s (LOW) has also seen moderate expansion in its margins—primarily brought about by higher comps sales growth like Home Depot. In contrast to Home Depot and Lowe’s, several companies in the home furnishing and home improvement industries have exhibited cost-side pressures, despite moderate top-line growth. These companies include Pier 1 Imports (PIR) among others. That has been partly due to pressures stemming from cost control in terms of product costs. It’s also due to the higher US dollar.

Outlook

Home Depot could continue to benefit from the e-commerce impact and the higher number of customization options that the company’s making available to customers. Web sales also tend to have higher ticket sizes. This provides more upside to the top line. The company will likely continue to benefit from lower energy prices and its cost-cutting programs.

This will likely improve the store productivity metrics. Home Depot’s EBIT per square foot has been on an upwards trajectory due to the impact of nearly stagnant store expansion, faster sales growth, and supply chain and productivity improvements.

However, commodity price deflation may continue to adversely affect the results. Also, the legal liability of the company’s data breach isn’t a clear-cut number yet. Although this is partially insured, uncertainty over the final figure remains. It could be a drag on Home Depot’s future results.

Home Depot accounts for ~1.8% of the portfolio holdings in the Vanguard Growth ETF (VUG). It accounts for 0.88% of the SPDR S&P 500 ETF (SPY).

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - What to Expect from Home Depot’s Earnings in 3Q16

• Part 2 - Why Home Depot’s Sales Expectations Rose in 3Q16

• Part 3 - E-Commerce and Appliances Could Spur Home Depot’s Comps