Here's Why Home Depot (HD) Stock Is An Investor Favorite

The Home Depot, Inc.’s (NYSE:HD) five-year long trend of beating earnings estimates, robust growth strategies, solid focus on Pro Customers and a disciplined capital allocation strategy make it a safe pick for your portfolio.

Driven by these attributes, shares of this world’s largest home improvement specialty retailer surged 34.8% in the past year. The stock has outperformed the industry’s gain of 27.2% and the broader Zacks Retail-Wholesale sector’s growth of 26%. In addition, this Zacks Rank #3 (Hold) stock boasts a VGM Score of A and a long-term earnings growth rate of 13.4%.

Growth Drivers

Home Depot has been implementing several initiatives to drive growth. In response to the evolving retail environment, where digital and physical stores go hand in hand, the company remains keen on building its interconnected capabilities. In this direction, it has made great strides by redesigning its website with enhanced features for better search and faster checkout, upgraded mobile app, and addition of the estimated time of arrival feature. Further, the company continues to invest in fulfillment options to cater to customers’ demand through the launch of its customer order management system and the Buy Online Deliver From Store capability.

Being a leading player in the highly-fragmented home improvement industry, Home Depot is gaining from consistent focus on improving customer experience, solid execution and consistent housing market recovery. The company has been revamping itself by concentrating on square footage growth and maximizing productivity from its existing store base. It recently acquired Compact Power Equipment that marked another step toward improving its portfolio service offerings for its Pro customers. It is likely to have a positive impact on gross margin in fiscal 2017.

Meanwhile, a disciplined capital allocation strategy helps Home Depot to make investments to develop its business while using the excess cash to enhance shareholder returns. Further, the company remains focused on developing merchandising tools and increasing investment in e-commerce to boost top-line growth and enhance market share.

Home Depot’s five-year long trend of beating earnings estimates continued in third-quarter fiscal 2017 as well, with sales topping estimates for the fifth straight quarter. Results gained from strength in core business as well as relentless focus on affording innovative products, which enhanced interconnected customer experience and productivity. Steady housing market recovery and strong customer demand also remained tailwinds. Consequently, management raised its guidance and anticipates earnings per share to be up nearly 14% to $7.36 in fiscal 2017 compared with the previous guidance of 13% growth to $7.29.

Concerns/Weaknesses

Though Home Depot has been posting splendid results for a long time, the company’s gross margin looks troubled. Evidently, the company’s gross margin contracted 10 basis points year over year in third-quarter fiscal 2017 on lower sales due to hurricanes. While hurricane-related activities aided comps growth, gross margins on such sales were significantly below the company’s average. Unfortunately, this is likely to continue in the remainder of fiscal 2017. Moreover, competition from online retailers may impact performance.

Bottom Line

We expect the decline in gross margins to be temporary. Gross margin is expected to benefit from the company’s solid growth strategies.

Looking for Solid Retail Picks, Check These

Some better-ranked stocks in the broader Retail sector include Beacon Roofing Supply, Inc. (NASDAQ:BECN) , Zumiez Inc. (NASDAQ:ZUMZ) and Urban Outfitters, Inc. (NASDAQ:URBN) . While Beacon Roofing and Urban Outfitters sport a Zacks Rank #1 (Strong Buy), Zumiez carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Beacon Roofing, with a long-term earnings growth rate of 25%, has delivered an average positive earnings surprise of 6.4% in the last four quarters.

Zumiez, with a long-term earnings growth rate of 18%, has delivered an average positive earnings surprise of 22.2% in the last four quarters.

Urban Outfitters has a long-term earnings growth rate of 12%. Also, the company has come up with an average positive earnings surprise of 5.7% in the trailing four quarters.

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