Pat McKeough responds to many requests from members of his Inner Circle for specific advice on the top stocks to buy as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week an Inner Circle member had a question on one of North America’s top retail chains, Home Depot. The home-improvement firm is undertaking a strategic plan that brings online and smartphone applications into play for customers and contractors, while also aiming for better inventory control. Pat examines Home Depot’s financial outlook and assesses its prospects against stiff competition from other big-box home-improvement stores.
Q: Hi Pat: I am contemplating buying some Home Depot shares. Would you recommend a purchase? Best regards.
A: Home Depot (symbol HD on New York; www.homedepot.com), operates warehouse-style home-improvement stores that average 104,000 square feet, plus an additional 24,000-square-foot garden centre. Each outlet typically carries 30,000 to 40,000 items.
The company now has 2,260 locations in the U.S., Canada, Mexico, Puerto Rico and Guam.
In 2012, Home Depot announced a strategic plan that includes initiatives like letting customers buy online and pick up their orders at the nearest store. The company has also launched a new smartphone application that makes it easier for contractors to check inventories at certain stores, and place orders.
Another part of the plan involves expanding into new categories, including appliances like washing machines and dryers. About 400 of the company’s stores now have appliance showrooms.
At the same time, Home Depot is doing a better job of controlling its inventories, which has freed up cash for share repurchases. It has already bought back $6.4 billion worth of its common shares under a $17-billion authorization. There is no time limit for these purchases.
Rising U.S. home prices and severe winter storms prompt renovations and appliance sales
In its fiscal 2014 third quarter, which ended November 3, 2013, Home Depot’s sales rose 7.4%, to $19.5 billion from $18.1 billion a year earlier. The company opened two new locations in Mexico during the quarter. Same-store sales (which measure sales of stores open for at least one year), rose 7.4%, thanks to a 4.0% increase in the number of transactions and a 3.2% rise in spending per visit. Online sales jumped 50% but accounted for just 3% of Home Depot’s total.
Earnings rose 21.5%, to $1.35 billion from $1.1 billion. Earnings per share gained 28.4%, to $0.95 from $0.74, on fewer shares outstanding.
U.S. home prices continue to rise, which should keep prompting homeowners to renovate and buy appliances. Moreover, severe winter storms in the past few weeks should spur demand for portable generators and snow blowers.
As the year progresses, the company plans to keep expanding its appliance selection and better integrate in-store and online shopping.
Home Depot’s $1.56 dividend yields 1.9%.
In the Inner Circle Q&A, Pat looks at Home Depot’s outlook in the face of strong competition in the home-improvement field. He also examines the company’s balance sheet and its earnings forecast for 2014 and 2015. He concludes with his clear buy-hold-sell advice on this stock.
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Do you invest in retail stores that you shop at regularly or do you keep your shopping habits and investment decisions separate? Do you have examples of retails stocks that turned into strong long-term investments for you?
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