19 May 2010

HD: Income Statement Analysis for the April 2010 Quarter

The Home Depot, Inc. (NYSE: HD) earned $0.43 per diluted share on a GAAP basis in fiscal 2010's first quarter, which ended on 2 May 2010.  Home Depot's latest EPS was 41 percent more than the $0.30 it made in the same quarter last year.

On a non-GAAP "adjusted" basis, earnings increased from $0.35 to $0.45 per share, 29 percent.  The non-GAAP numbers exclude store closing charges, business termination expenses, restructuring costs, and the results of discontinued operations.

This post examines Home Depot's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Reported earnings were $0.04 better than the $0.39 per share we had forecast.

The principal sources for this income statement analysis were the earnings announcement and the ensuing conference call (transcript available from Seeking Alpha).

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.

The Home Depot, Inc. (NYSE: HD) is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products.  The company operated 2,244 retail stores at last count, of which 1,976 (88 percent) were in U.S. states or territories.  Home Depot competes with Lowe's (NYSE: LOW), cooperatives such as Ace and True Value, and a multitude of smaller hardware stores.  Additional 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 $16.9 billion, 4.3 percent more than last year's $16.2 billion.  The latest quarter was the first since February 2008 in which Revenue exceeded the year-earlier amount.  The 4-percent growth rate was best result since January 2006.

Revenue for the quarter was 3.6 percent more than the $16.3 billion we had estimated.  Our figure was derived from both the company's sales guidance for the year and from seasonal patterns.

Comparable (akin to same-store) sales in the first quarter grew 4.8 percent overall and 3.2 percent in the U.S. 

Sales growth was achieved in nearly all regions and categories of merchandise.  Early spring seasonal products sold well.  However, sales to professional customers were down again, the average sale per transaction ("ticket") fell 1.3 percent in the U.S., and the number of tickets over $900 slipped 1.4 percent.

The Cost of Goods Sold (CGS) increased to $11.1 billion (65.6 percent of Revenue) from $10.7 billion in the year-earlier quarter.  The latest results translate into a Gross Margin of 34.4 percent, about 70 basis points more profitable than the 33.7-percent margin in last year's first quarter.  Home Depot attributed the margin expansion to product mix changes and fewer promotions this year, plus some special circumstances last year that lowered the margin in the earlier period.

Home Depot beat our 34.0-percent estimate for the Gross Margin by 40 basis points.

Depreciation and Amortization charges of $411 million were 4 percent lower than last year. This expense category was 4.4 percent less than our $430 million target for the quarter.

Sales, General, and Administrative expenses increased 4.6 percent to $4.1 billion.  As a percentage of Revenue, these expenses inched up from 24.1 percent to 24.2 percent.

SG&A expenses were 4.4 percent more than our $3.9 billion target value, primarily because Revenue was higher than we expected. 

Subtracting the various operating expenses from Revenue yields Operating Income of $1.3 billion, up an impressive 33 percent from $980 million in the year-earlier quarter.  The increase can be credited primarily to Revenue growth and the more lucrative Gross Margin.

Operating Income surpassed our $1.2 billion estimate by 8.9 percent. As mentioned above, Revenue and Gross Margin both surpassed our expectations.

The $189 million Non-Operating expense was nearly $30 million more than we anticipated.  The quarter included a $51 million charge ($0.02 per share, after taxes) was due to the 18-month "extension of the Company’s guarantee of a third-party [HD Supply] senior secured loan."

The effective income tax rate was 35 percent, less than the 37-percent rate we had assumed.  Favorable state tax settlements reduced the tax rate.

This brought after-tax Net Income to $725 million ($0.43 per share), which was more than 40 percent better than the $514 million ($0.30 per share) earned in last year's first quarter.

Net Income exceeded our $654 million ($0.39 per share) forecast by $71 million, or 11 percent.  The quarter surpassed many of our targets; the only appreciable negative was a one-time, non-operating charge of $0.02 per share.
Full disclosure: Long HD at time of writing.

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