Home Depot (HD) stores may be nothing to look at, but I am obsessed with walking into the company's stores in search of new energy-efficient products from General Electric (GE) and Cree (CREE). I suspect I will have even more fun, once additional Dropcam and 3D-printing shops open at home improvement chains, and when outposts for online order pickup are erected.
There is a hidden reason that Home Depot, and its rival Lowe's (LOW), are putting up solid same-store sales and earnings growth. That reason is the demise of Sears (SHLD) as the go-to place for a lawnmower, a refrigerator, or a screwdriver.
Sears' dwindling market share of the home improvement industry is a key reason, among many, that it will eventually go out of business. The product presentations in the store are no longer up to par. Delivery snafus are on the rise (see @SearsCares on Twitter).
Home Depot and Lowe's have improved their customer service in appliances and on the sales floor. They are not in financial positions that require them to cut square footage. Furthermore, a Home Depot store is completely retrofitted, with smaller distribution centers, allowing it to deliver products to consumers quicker than ever before. Sears is closing distribution centers as part of its store-closing plan.
What should you look for in Home Depot's earnings report, to see if this premium-valued stock is worth a buy at these levels? Here is your checklist:
1. Accelerated same-store sales growth rate versus the second quarter of 2014.
2. Another guidance lift on the full year (the previous guidance was announced in September).
3. Sales in the first 10 days of November. Home Depot is coming in strong for Macy's (M), J.C. Penney (JCP), and Kohl's (KSS), due to lower gas prices and more seasonable weather.
4. No gaffes by new CEO Craig Menear, who began in the role on Nov. 1. You would be able to see if he gaffed, by watching the stock price during the earnings call. Home Depot is not a company to go through frequent leadership changes, so it's imperative that Menear endears himself to investors, by showing them could handle the job for the long term.
What I Am Hearing
Bits and pieces from executives behind the scenes:
As the fourth quarter ends, the plunge in fuel price may cause many fuel-intensive companies to be revalued by Wall Street. Executives view the benefit as not material in 2015 earnings estimates. Manufacturers and heavy machinery operators would be the first in line for revaluations, as we are not yet seeing consumers spend their gas savings at consumer companies. If you are a cruise line operator, you have to fill the boat with fuel!
Investments in technology infrastructure are getting out of hand, and it is much more burdensome to bottom lines than specific initiatives are. Healthcare and technology costs are two of the bigger risks to the earnings of large company in 2015. Technology could also be a headline risk. Investors expect tech projects to yield benefits immediately, but that is often not the case.