Home Depot Q2
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Home Depot Q2
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %> UNION CITY, Ca., August 13, 1996/FOOLWIRE/ --- Earlier this morning the Home Depot reported 1996 Q2 net earnings of just over $270 million, up 27% from last year. Earnings per share were $0.56, up 26% and a penny above consensus estimates. Q2 results marked the company's 42nd consecutive quarter of record profits. Home Depot continues to gain market share and, at the same time, generate outstanding profits.
The strong financial results for the quarter are due to record sales performance and their success in leveraging recurring expenses. In their Q1 conference call they said that comps began to accelerate around the third week of April as pent-up demand materialized following a slow start to the Spring season. This pent-up demand, as opposed to the timing of relationships to various economic indicators generated strong sales in the first half of Q2. It also helped offset any impact from the Olympics as comps returned to more normal levels toward the end of the quarter.
Sales for Q2 were $5.293 billion, up 27% from the previous year. Comp store sales were up 9%. Excluding the effect of cannibalization, which was 54 new stores affecting 94 existing locations, comp store sales for the remaining 281 stores would have been 12%. For the year-to-date, sales were $9.655 billion, up 25% from the previous year, and comp sales were 6%. They expect the cannibalization impact on their comp store sales to stay at the 3-4% level for the rest of the year. They saw an improvement in lumber sales trends during Q2 which resulted from pent-up demand and a modest increase in lumber prices during the latter part of the quarter.
They opened 15 new stores and relocated 1 store in Q2. Of these 15 stores, 4 opened in May, 4 in June, and 7 in July. New stores opened in Columbus and Athens, GA; Clackamas and Jantzen Beach, OR; Reading and Upper Darby, PA; Enfield, CT; Cicero, NY; Bellingham, MA; Columbia, MO; Downers Grove and Naperville, IL; Brooklyn Park and Coon Rapids, MN; and St. Catherines, Ontario in Canada. The one relocation was the Gretna store in New Orleans which increased from 79,000 to 102,000 square feet.
At the end of the quarter, total square footage totalled 48.033 million square feet, a 21% increase over last year. The average square footage per store was up 1% to 105,300 compared with 104,600 last year. The total number of stores increased 20% to 456, up from 379 in Q2 1995.
The number of customer transactions was up 27% to 124,840,000 for the quarter, and up 25% to 229,048,000 for the year-to-date. Their average customer sale was up 1% to $42.40 for the quarter and up slightly to $42.15 for the year-to-date.
Weighted average weekly store sales were up 5% to $511,000 for the quarter, and up 2% to $848,000 for the year-to-date. Sales per square foot were up 4% to $449.87 for the quarter and up 1% for the year-to-date. They were pleased that these last 3 sales drivers were up this quarter after being down the past two quarters.
Gross margin was 27.15%, ten basis points higher for the quarter. Merchandise mix produced some of this increase as well as more effective buying which reduced their cost of merchandise. Year-to-date, the gross margin was 27.52% or 5 basis points higher. They expect margins going forward to be flat with last year.
Selling and store operating expenses were 17.09% versus 16.85% for the quarter, a net increase of 24 basis points. The increase is mainly the result of Olympic activities and the impact of Financial Accounting Standard number 121, partially offset by improvements in normal operating expenses. One-time expenditures related to the Olympic Games contributed to the increase in selling and store operating expenses over the prior year. This incremental expense amounted to approximately $7 million for the quarter, or 14 basis points. Benefits they obtained from their Olympic experience were as follows: national exposure on television, solidified relationships with key vendors, employed over 100 Olympic athletes making Home Depot the largest employer of Olympic athletes in history (25 of which qualified for the games and 6 won medals). They also created great morale with their associates all over the country. They estimate an additional $4 million in expense will be incurred in Q3 for the Olympics and the Paralympics.
Other expenses, which include primarily the cost of store relocations and remodels were $9 million in Q2 compared to $1 million last year, a difference of approximately 16 basis points. Included in the $9 million of other expense are the expenses related to two stores to be relocated in Q4 1996 and one store to be relocated in Q1 1997. As they have said in their two previous conference calls, they are required to recognize this expense earlier than the store closing date due to the implementation of FASB 121. They estimate relocation and remodel costs for Q3 and Q4 1996 to be $4 million and $3 million respectively, compared to $3 million and $2 million respectively for the same quarters of 1995.
Also included in operating expenses was a minority interest in the Home Depot Canada. Because they made more money in Canada in Q2 1996 versus Q2 1995, the minority interest had a negative impact of 5 basis points for these expenses. Pre-opening expenses for the quarter were $10.143 million compared to $13.485 million last year, down 13 basis points. Expenses were for 15 new stores in this quarter plus one relocation, versus 20 stores last year. The decrease in pre-openings reflects the timing of new stores in that many Q3 stores will fall into the latter part of the quarter. They expect pre-opening expenses in 1996 to average approximately $600,000 per store.
G&A expenses were 1.51% versus 1.63% for the quarter and 1.58% versus 1.72% for the year-to-date. G&A percent was down resulting from higher sales volumes and their continuing focus on cost control. In addition, they incurred Olympic expenses in G&A as well. Excluding these one-time expenses, recurring G&A costs as a percent of sales would be 1.45% instead of 1.51% for the quarter.
Looking at interest for the quarter, they had net income of 5 basis points compared with net income of 8 basis points last year. Capitalized interest was $5.4 million for the quarter compared to $3.8 million last year. The increase was due to higher commercial paper borrowings. Year to date, capitalized interest was $12.2 million versus $8.8 million last year. Pre-tax income for the quarter was 8.4% versus 8.32% last year. The year to date was 7.92% versus 7.79% last year. The tax provision was 39.2% for the quarter and year to date compared to 38.4% last year. In Q4 fiscal 1995, the tax rate was adjusted upward to 38.8%. They continue to open more stores in states with higher tax rates resulting in a higher effective state rate. They expect the rate to be 39.2% for the balance of this year.
Net earnings for the quarter were $270.174 million or 27% over last year. Year to date, net earnings were $465.193 million or 26% ahead of last year. Earnings per share for the quarter were $0.56 versus $0.45 last year, a 26% increase, and for the year EPS were $0.97 versus $0.78 last year, a 24% increase.
On the Balance Sheet, they had cash and short-term investments of $33,457,000. Inventory turnover for the year calculated based on quarterly ending inventories was 5.8 this year versus 5.8 last year. Turnover improved versus Q1, 5.3 versus 5.5 last year. This was due to the sales increases they saw during Q2 and due to their continued focus on controlling inventories. They are pleased with the increase in turnover in Q2, which made up for the lower turnover in Q1. Average inventory per store is up 4% primarily due to higher sales per store, larger stores with greater sales potential, and 312 expanded garden centers versus approximately 234 last year. Their trade accounts payable was $1,229,334,000 or 49% of inventory compared to 54% last year. Current ratio is 1.48 to 1 compared to 1.42 to 1 last year. Their long-term debt is $275,389,000 and includes capital leases and industrial revenue bonds as well as $166 million of commercial paper outstanding at the end of Q2. Stockholders equity is $5,469,000,000. Debt to equity ratio was 5%. Capital expenditures were $267,098,000 for the quarter and $547,688,000 for the year to date. They now own 334 of theis stores, or 73%. They expect to spend approximately $1.2 billion in 1996. Over 90% of that will be for new stores and most of the balance will be for rennovations, additions, and computers. An additional $300 million in capital expenditures will be financed through an off-balance sheet financing vehicle which they closed during Q2.
They plan to open 24 new stores in Q3 as follows: NE Jackson and Southaven, MS; Conyers, GA; Cordova and Hickory Hill, TN; W. Little Rock, AR; Wendover, NC; Norman, OK; San Raphael and Rancho Cucamonga, CA; Louisville, CO; Henrietta and New Rochelle, NY; Egg Harbor, NJ; West Mifflin, Wilkins Township, and N. Fayette Twp., PA; Rockland, MA; West Hartford, CT; Annapolis, MD; Waterford, CT; Northlake, IL; and Vancouver, British Columbia in Canada. In addition, they will open one Expo store in Miami.
They expect to open 33 new stores and relocate 2 additional stores in Q4. By the end of the year, the total store count is expected to be 513 stores versus 423 stores at the end of 1995.
This year, their Midwest division will add stores at a rate of 63%. New markets this year include Flint MI, Minneapolis/St. Paul, St. Louis, and Columbia MO. They are pleased with the progress they are making in the Midwest due primarily to achieving scale in the largest markets. They also have increased name recognition through ongoing advertising. Their more experienced associates who are getting better at taking care of customers in all the Midwest markets will continue to rapidly grow the Midwest divisions.
July 30th they announced plans to open a new Expo design center in Miami in October 1996. Their original plan was to defer further Expo growth beyond 1996 until they resolve some format and service issues related to the Expo concept to their satisfaction. They were able to resolve these issues faster than expected and this store will be the first test of the revised concepts. The primary differences of the new Expo design center are in the merchandise mix which requires less square footage and the improved customer transaction processing. The new location will be approximately 80,000 square feet compared to 140,000 square feet in the prior two Expos. The focus in the new store will be on project based customers, effective management of projects from start to finish, and streamlined transaction processing. To accomplish this they will be expanding some key merchandise areas and reducing or eliminating others. In addition, they are reorganizing the workflow to eliminate steps in special order and other transaction processing and to provide better customer service. They are excited about the revised Expo format and will continue to work with the concept to provide the best products and services to their customers.
In April of 1996 they began an initiative which will focus on improving their business processes so they can become more efficient and leverage their cost structure as they grow. During Q2 they completed the diagnostic phase which identified areas of opportunity. Some of the simpler ideas are currently in progress while they are moving forward with the planning phase for the major projects they will undertake. Most of the benefits from these initiatives will begin to materialize next year. However, they are not providing details due to competitive reasons.
1996 is shaping up to be another great year for the Home Depot. At the end of 1995 they said that 1996 would be a critical year for some of their competitors and they continue to feel that way. They have widened the gap competitively and financially between themselves and their competition during the first half of the year. They are very proud of their Q2 performance which continues their pattern of consistently strong increases in sales and earnings as they grow their market share. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |