We plan to raise our $217 per share fair value estimate for wide-moat Home Depot (HD) by a mid-single-digit rate after incorporating robust first-quarter sales growth of 33% (to $37.5 billion), which outpaced our estimate by $4 billion. Strength came from same-store sales that rose a whopping 31% (on top of a 6.4% rise a year ago), while orange box (ex-MRO) performance was also stout, with average ticket rising 10%, customer transactions higher by 19%, and sales per square foot up 30% as consumers embarked on big ticket projects. More impressive was the profitability Home Depot captured on its rising scale, delivering a 15.4% operating margin (up 380 basis points), despite commodity headwinds. And the firm continues to capture market share, with its top line outpacing building material and garden equipment and supplies industry growth that averaged 25% (seasonally adjusted, U.S. Census) in February-April.
As the firm moves ahead, it is set to lap above-20% same-store sales growth in the final three quarters of 2021, potentially challenging its ability to capture sustainable positive sales performance over the near term. However, top-line stability could stem from HD’s tie up with HD Supply, which we had forecast to generate $3 billion in sales during 2021 pre-acquisition. Since the beginning of May, Home Depot is tracking above 30% two-year stacked comps, but the firm was hesitant to offer an update to its 2021 same-store sales or profit outlook given the opacity caused by COVID-19 and stimulus-related demand. In February, Home Depot had set an initial 2021 forecast calling for flat to slightly positive same-store sales growth and above 14% operating margin (if existing trend patterns persisted). Even with modest operating margin contraction (50-100 basis points) in the back half of 2021, an operating margin above 14% should be easily achieved. We don’t plan to alter our long-term outlook for Home Depot, which includes 3.5% sales growth and above 15% operating margins.
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