Home Depot Q4 2020

Updated: Mar 11, 2021



I usually just like to pick out the key points in the earnings calls, not everyone wants to spend 35-40 minutes reading a report. Nor does everyone have time! I know how valuable time is so I want to crunch this into condensed informational posts. Another great report from a great business, as well as another 10% dividend raise. This is an attractive business for long-term shareholders.


The business beat Q4 GAAP EPS by $.03, coming in at $2.65. Revenue increased a whopping 25.1% YoY to $32.3b, these comps for the 2021 year will be next to impossible to beat in my opinion. Comparable store sales were +24.5% vs the consensus of +19.2%, absolutely crushing analyst expectations. This is an equity, as I have stated in previous posts, that I think you accumulate in the 2021 year. It most likely will not be a super sexy rapid growth stock, but I do believe it will provide stability and income especially for those looking for yield (oh so hard to find). While everyone is focused on leisure and travel stocks, I think it's OK to accumulate Home Depot in the background.


CFO: "We were pleased with our record financial performance in fiscal 2020. As we look ahead to fiscal 2021, while we are not able to predict how consumer spending will evolve, if the demand environment during the back half of fiscal 2020 were to persist through fiscal 2021, it would imply flat to slightly positive comparable sales growth and operating margin of at least 14 percent," said Richard McPhail, executive vice president and CFO.


Full year sales grew 19.9% for a mega cap business. Sit back and think about that for a second, sales for full year 2020 came in at $132.1b, up $21.9b YoY. Somewhat surprised they were unable to give guidance even conservative guidance for 2021, but that does not worry me too much. I trust management. This year was such an anomaly. Now lets digest the earnings call.


Craig:


Craig states that revenue growth was a surprise, and how the technological investments are paying off (something we have been saying for quite some time with the One Home Depot Strategy). Reducing online delivery lead times and improving the customer experience has been a priority for the company, and they are executing very well (as seen in the financials). They continue to see a physical and digital blend which is exactly what we want to see, creating their own competitive advantages and carving their own path. Another Q of strong double digit growth in DIY and Pro customers. Management states "Our interconnected retail strategy and underlying technology infrastructure have continued to support record level web traffic on a consistent basis throughout the year. For the quarter, sales leverage in our digital platforms increased approximately 83% versus the prior year and approximately 55% of online orders were fulfilled through a store. For the year, sales leveraging our digital platforms increased approximately 86% versus last year and approximately 60% of online orders were fulfilled through a store." -Craig Menear


I continue to believe HD should be accumulated over the 2021 year. They are committed to shareholders as well and increasing the dividend by 10% which equates to $1.65 per share, annual dividend of $6.60. Capital allocation has always been a strong priority at The Home Depot. The business is experiencing unprecedented levels of demand across the business, which put pressure on their supply chain and they continue to make progress with their partners (this is probably a good problem to have). Sales to Pro customers also continue to accelerate, posting the best Q of 2020. The fourth quarter experienced similar trends as they saw all of 2020, customers continue to spend more time at home and project lists are growing.


Richard McPhail:


"Our diluted earnings per share for the fourth quarter were $2.65, an increase of approximately 16% compared to the fourth quarter of 2019. The onetime expenses related to the completion of the HD Supply acquisition of approximately $110 million negatively impacted our fourth quarter diluted earnings per share by approximately $0.09. Diluted earnings per share for fiscal 2020 were $11.94, an increase of 16.5% compared to fiscal 2019."


This is fine with me, Home Depot also opened 5 new stores in the year bringing their store count to 2,296, expansion during a pandemic I am in! The business still stands in a strong liquidity position as well even with their acquisition of HD Supply. In FY 2020, Home Depot incurred $2b of expenses related to enhanced benefits and pay for associates, and the business now has an increased permanent $1b expenses in an annualized basis. I dont expect much to come out of this on crimping their margins, but it is something to watch for certainly if these increase over the years.


Fiducia Thoughts and Q&A Section


Obviously the pandemic tailwinds will not persist all of 2021 and comps are going to be tough to beat, to me that is automatically baked into the current share price and the potential upside are surprises through the fiscal year. Since they are not giving FY21 guidance, I am under the assumption that analysts will be conservative and Home Depot will most likely beat analyst estimates. The high engagement from DIY customers is pretty awesome, spending is strong for home improvement projects. I assume people who did not need "stimulus checks" probably used it towards their home one way or another! Guidance be difficult, I get it, I am sort of upset they could not have been at least conservative with 0% growth on top line. Maybe it is just that tough to forecast currently given the pulled forward demand, this is not managements fault in a guide (understand that). If Home Depot can hit 14% margins with comps flat in 2021, that would be a very ideal situation in my opinion.


Craig and Richard both spoke about how they started the investment program in 2017, through 2018-2020, based on their data (the best they can get) they have captured 275bps of share growth during that time frame. If we take that share and translate into dollars, management estimates about $10b incremental sales annually to top line vs where they were in 2017. Scale matters. There was not as much color on HD Supply as I would have liked in the Q&A honestly. Like I have said in my previous Home Depot post, while people focus on the re-open stocks and travel and leisure, I think you accumulate Home Depot in the background. COVID costs should mitigate through the year, which could also lead to better than expected profits.


I still think Home demand will be strong into summer and given the better weather, people are going to LOVE to be outside after a cooped up winter. Flowers, gardening, etc.


My last free summary report before paid kicks in, thank you for following!

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