20 January 2008

HD: Look Ahead to January 2008 Quarterly Results

While we wait for Home Depot (HD) to report its results for the quarter that ends later this month, we have produced an estimate of the Income Statement that will be included in the report. As explained below, the calculations rely on publicly available data, extrapolations of past results, and what we hope proves to be common sense. The estimates give us some insight into the operational and non-operational factors that might cause the company to surpass or fall short of Net Income expectations. Once the actual data becomes available, we will compare the estimated and actual data and note the deviations.

When reporting third-quarter results last October, Home Depot management issued the following negative guidance:

Given that the softness in the housing market is expected to continue for the rest of 2007 and the Company's commitment to invest in its key retail priorities, The Home Depot expects its earnings per share from continuing operations, on a 52-week basis, will decline by as much as 11 percent from last year. The fiscal 2007 earnings per share outlook reflects 52 weeks and does not include the impact of the 53rd week. The Company will have 53 weeks of operating results in fiscal 2007. The Company projects that the 53rd week will add approximately five cents to its earnings per share outlook for fiscal 2007.

Reported earnings per share in fiscal 2006 were $2.79. From what we can tell, and we don't have the complete picture, earnings per share from continuing operations were about $2.60. If we decrement the latter figure by 11 percent, and add back $0.05 for the 53rd week, Home Depot seems to be guiding us towards $2.36 per share for the fiscal year ending this month.

In the first three quarters of the current fiscal year, earnings from continuing operations were about $1.84 per share. This suggests that management expects fourth quarter earnings of around $0.52, depending, to a certain extent, on how many shares the company has repurchased.

The guidance doesn't directly address the quarter's Revenue, and this presents a challenge for us. In the January 2007 quarter, sales were $20.265 billion, but this value includes receipts from the former Home Depot Supply business. The Supply segment contributed 13 percent of total corporate Revenue in the previous year, which suggests that the comparable year-earlier quarterly sales value is closer to 17.6 billion. If we trim this by another 3 percent to reflect current market softness -- sales in the preceding quarter (October 2007) were down 3.5 percent -- our Revenue target for the January 2008 quarter is $17.1 billion.

Home Depot's Gross Margin as a percentage of Revenue averaged 33.4 percent over the last three quarters. Therefore, given our expectation for Revenue, the Cost of Goods Sold (CGS) in the January quarter should be about (1-.334) * $17.1 billion, or $11.4 billion.

Depreciation expense has been about 2 percent of Revenue, but we expect this to edge up to 2.2 percent because sales will slow faster than depreciation. It should be around $380 million (0.022 * $17.1 billion) for the quarter.

Sales, General, and Administrative (SG&A) expenses as a percentage of Revenue have been between 20 and 23 percent, with recent results closer to the higher end of the range. For the fourth quarter estimate, we will assume 22 percent. Accordingly, we're expecting SG&A expenses to be 0.22 * $17.1 billion, or $3.8 billion.

Our estimates for Revenue and Operating Expenses would result in an Operating Income of $1.6 billion.

Net interest and other expenses has recently been about $140 million per quarter. This value would decrease pre-tax income to $1.4 billion.

A 37 percent income tax rate is usually a pretty good estimate for Home Depot. This rate would suggest that provisions for income taxes will be $530 million, and Net Income will be $900 million ($0.50 per share, if the number of shares outstanding hasn't changed much from the October quarter).

This is $0.02 less than where we think the company guidance leads (see above), but given all the assumptions made, we feel like we are on the right track.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)

Jan 2008
Jan 2007

Op expenses

CGS (11405)

Depreciation (377)

SG&A (3767) (4594)

Operating Income
Other income


Interest, etc.
Pretax income

Income tax

Net Income


1. The January 2006 data does not include the reclassifications needed to account for discontinued operations.

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