17 November 2009

HD: Income Statement Analysis for the October 2009 Quarter

The Home Depot, Inc. (NYSE: HD) earned $0.41 per share in the third quarter of fiscal 2009, which ended 1 November 2009, down from $0.45 in the same quarter of last year. 

This post examines the Income Statement for the quarter in the earnings announcement and compares the entries on each line to our "look-ahead" estimates.  Our target for Home Depot's Net Income in the latest quarter was $0.39 per share, $0.02 less than the reported amount.

In a second article, we will report Home Depot's scores as measured by the GCFR financial gauges.  The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Home Depot is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products.  Some background information about Home Depot and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue was 8.0 percent lower than in the third quarter of 2008.  We had estimated that Revenue would fall 8.4 percent, so Net Sales were marginally better than we expected.  Our estimate was derived from the company's prior guidance for the fiscal year and normal seasonal patterns.

Same-store sales in the third quarter fell 6.9 percent relative to the same period of last year.  It's interesting that the number of customer transactions was almost the same as last year, but the average sale ("ticket") per transaction fell 7 percent.

The Cost of Goods Sold (CGS) was 66 percent of Revenue in the quarter, which translates into a Gross Margin of 34 percent.  The margin surpassed our estimate of 33.5 percent and last year's actual margin of 33.7 percent.

Depreciation and Amortization expenses were $7 million (2 percent) less than our target, which assumed a figure similar to that in the three previous quarters.

Sales, General, and Administrative expenses were just 1 percent more than we had estimated.  The expenses totaled 23.7 percent of Revenue, whereas we expected 23.5 percent. 

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was only 4.5 percent less than last year.  We estimated that Operating Income would fall almost 10 percent.  The actual result exceeded the projected value primarily because Revenue and Gross Margin were both better than expected.

In the Non-Operating area, the net interest expense came within a whisker of the $165 million we anticipated.

The effective income tax rate was 37.3 percent, somewhat more burdensome than the forecast of 36 percent.

Overall, Net Income was down 8.9 percent. Our estimate was too low by 4.5 percent.

In summary, Home Depot's results for the third quarter were down relative to last year but moderately better than expected.  Revenue did not fall as much as we had estimated, and the Gross Margin was 50 basis points higher than our target.  SG&A and interest expenses were very close to our target values. 

Earnings per share could have been a penny higher if the effective tax rate had not edged up.

Full disclosure: Long HD at time of writing.

No comments:

Post a Comment