Home Depot Has the Tools to Withstand Woes of Tractor Supply and HD Supply

Don't expect the home improvement giant to succumb to the same pressures as its peers.

Be careful not to lump the operations of Home Depot (HD)  and recent woes of Tractor Supply (TSCO) and HD Supply (HDS) into the same cart.

Often grouped as industry peers, Tractor Supply and HD Supply have been tumbling this week after an earnings whiff and lowered guidance, but there is no reason to suspect that Home Depot will fall next. 

On Wednesday Home Depot's Atlanta-based neighbor, HD Supply, fell short of quarterly earnings expectations after booking non-adjusted earnings per share of $0.51, 20% below consensus forecasts, while sales of sales of $2 billion also missed estimates by about 1%. Shares promptly fell about 15%.

And now on Thursday shares of Tractor Supply fell about 16% after the home improvement retailer cut its sales guidance. Now for the full year, Tractor Supply expects sales to clock in at range of between $6.7 billion and $6.75 billion, down from prior estimates of $6.8 billion to $6.9 billion.

The moat protecting Home Depot? On one hand, the home-improvement market that Home Depot primarily caters to does not have substantial overlaps with Tractor Supply's roughly 15,000 U.S. stores primarily focused on meeting the demands of recreational farmers and ranchers, primarily in rural areas.

And on the HD Supply front, in which there are more meaningful overlaps, the disappointments in HD's earnings results do not reflect end-market demand. In fact, management was clear to point out on a Wednesday earnings call that its views on demand for its home-improvement products this year are unchanged since earlier this summer.

"There has been no material change to our formal end market perspective since our call in June 2016," CFO Evan Levitt said, noting residential and non-residential construction growth should continue to pick up in the mid-single digits on an annualized basis, and products tied to water infrastructure will continue to climb somewhere in the low-to-middle single digits.

 

In short, there's no reason to suspect Home Depot's fundamental businesses will be affected by the troubles at Tractor Supply and HD Supply, and investors may have been overly skittish in selling off about 2% of Home Depot's market cap over the past two days. And this could be an opportunity put Home Depot shares back in the shopping cart. 

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