SMF Notes HD Home Depot 2Q2013 earnings preview (52.96 -0.10)

Top Points:
HD is set to report second quarter fiscal 2013 tomorrow before the market open followed by a conference call scheduled for 9:00 am ET. Capital IQ estimate calls for EPS of $0.98 and revs of $20.7 bln.
On June 19, co reaffirmed guidance for FY13 (Jan). Co sees EPS of $2.90 vs $2.93 Capital IQ Consensus Estimate; sees FY13 (Jan) revs of +4.6% YoY calculating to ~ $73.63 bln vs $73.93 bln Capital IQ Consensus Estimate. Co also reaffirmed its 2015 12% operating margin tgt and 24% ROIC tgts.
On June 6, co updated its FY2013 share repurchase guidance to ~ $4.0 bln. This was an increase of $500 mln from the guidance provided in May 2012, but given the timing of the repurchases, the increase will not have a material impact to diluted EPS for fiscal 2013. In June 2009, the co announced a long-term operating tgt of a 10% operating profit and 15% return on investment capital. The co announced that it anticipates achieving this tgt by fiscal year end.
Last week, HD and U.S. Home Systems (USHS) announced a definitive merger agreement for The Home Depot to acquire USHS for $12.50/share in cash.
Key Points from Last Quarter:
HD reported Q1 (Apr) earnings of $0.65 per share, excluding non-recurring items, in-line with the Capital IQ Consensus Estimate of $0.65; revs rose 5.95 YoY to $17.81 bln vs the $17.89 bln consensus. Co attributed the stronger-than-expected start to the year to record warm weather and continued demand for core products.
Comparable store sales for Q1 were positive 5.8% and comp sales for U.S. stores were positive 6.1%. Mgmt estimated weather positively impacted U.S. comps by 300 basis points, of which between 80 and 100 was an estimated pull forward of activity that otherwise would have occurred in Q2.
Total transactions grew by 3.9% while average ticket also increased 2.2% for the quarter. Transactions for tickets under $50, representing ~ 20% of co's U.S. sales, were up 2.5% for the first quarter. Transactions for tickets over $900, also representing ~ 20% of U.S. sales, were up 6.7% in the first quarter.
At the end of the quarter, inventory was $11.6 bln, down ~ $100 mln YoY. Inventory turns were 4.3 times, up from 3.9 times last year. Co ended the quarter with $43.3 bln in assets, including $3.2 bln in cash. HD was about $500 mln ahead of its cash plan due in large part to in-the-money stock options that were exercised in the quarter.
HD's total gross margin was 34.7% for Q1, up 8 basis points YoY, of which 7 basis points came from HD's U.S. business. In the U.S., gross margin expansion was solely attributed to benefits arising from co's supply chain transformation. Excluding supply chain benefits, the gross margin for the U.S. was flat to last year due primarily to a change in the mix of products sold. For the year, co continues to expect moderate gross margin expansion.
Analyst Comments:
On July 17, co was downgraded to Neutral at Janney.
On July 3, CNBC discussed Cleveland Research piece; noted that firm suggested softer June sales and that Lowe's (LOW) and HD were likely running behind on Q2 comps.
On May 25, RBC noted that housing data suggested that softness in April comps at HD and LOW's was weather-related rather than a fundamental slowing in housing trends. They noted that lumber prices were starting to show a meaningful YoY increase which could be a potential sales benefit, but gross margin drag.
On May 16, following HD's Q1 earnings, Barclays noted that although the valuation multiple for HD has moved higher over recent months, they remained positive as eventual earnings results may be materially greater than current consensus, given the stabilization in housing trends. Firm reiterated HD as their Top Pick.