Is this it? I wonder. I have been waiting for an opportunity to get back into Home Depot (HD) .
Having been long the shares for many years without ever truly exiting that was exactly what I did earlier this year. It was not a bad sale, never is when the gain amounts to a few hundred percent long-term. Still, the sale was too early.
So, with the shares trading in the barrel early Tuesday, is this the discount that those waiting to enter, or re-enter have been waiting for?
Let's think about this.
For the third quarter, Home Depot reported earnings per share (not adjusted, actual EPS) of $2.53. That was exactly what we were looking for.
Revenue, at $27.22 billion, was good enough for year-over-year growth of 3.5%, but not good enough for Wall Street. The consensus view had been for more than $27.5 billion.
Beneath these headline numbers, other important metrics for retail success also struggled. Comparable store sales system wide printed at growth of 3.6%. That's solid in modern retail, but not when the Street is looking for 4.6% growth.
Focusing solely in the U.S., where Home Depot makes 90% of its sales, comp store sales hit the tape at very disappointing growth of 3.8%, versus expectations of 5.4%. That's quite a miss.
Digging deeper, operating income saw a 2% rise, while operating expenses grew by 3%. This put the squeeze on margins. Both gross and operating margin contracted a bit, as did net earnings from the same period one year ago.
Home Depot was able to eek out a small year-over-year gain in net cash provided by operating activities over the first nine months of the year largely due to changes in working capital and deferred income taxes.
Home Depot has been forced to reduce full-year guidance going into the fourth quarter. Sales for the full year are now guided toward a rough +1.8%. This is lower than the +2.3% guidance offered by the company three months ago, which itself was a reduction from prior guidance. That's not good.
Comp store sales are now expected to land at about +3.5% for the year, down from the +4% that had been expected. Home Depot, however, did re-affirm guidance for profitability. The company still expects to see full-year EPS of $10.03, which by implication could suggest better margin performance. The only problem with that is that the Street is generally about a dime higher than that.
Basically, the problem is this. The company launched a multi-year $11 billion program back in 2017 meant to upgrade the bricks-and-mortar experience, while also streamlining that experience with what customers realize through the digital channel. There has been an effort within this program to improve service, for professional customers in particular, with both same-day and next-day delivery.
On this transition, CEO Craig Menear indicated that the investment is on track and the results are positive, but -- and this is a big "but" -- "the benefits anticipated for fiscal 2019 will take longer to realize than our initial assumptions."
Investors should note the shares are trading early on Tuesday below the 50-day simple moving average of $232. This puts pressure on portfolio managers with large positions to reduce risk moving forward.
My thought on that is that those interested, myself among them, need to watch for now. The 38.2% retracement level close to $218 would be, to me, a good enough spot for entry, especially since the algos will see the resistance this spot offered back in July.
Trade Ideas (minimal lots)
If you are intent on buying this dip, you could...
-- Purchase 100 shares at or close to the last sale of $226.35.
-- Sell (write) one HD December 20 $232.50 call for roughly $2.45.
I am more likely to...
--Sell (write) one HD $220 put for about $3.15.
Notes: In the first example, the trader enters with a net basis of $223.90. Profit over the next month would be capped at the $232.50 level, or $8.60. The second example pays $3.15 upfront, but could leave the investor long 100 shares at a net basis of $216.85 with the shares trading below $220.