The Ratings Game: Home Depot’s investment plan weighs on fiscal 2020 outlook

This post was originally published on this site

Home Depot Inc.’s disappointing preliminary outlook for fiscal-year 2020 indicates that the company’s investment program to improve the customer shopping experience will put pressure on results in the coming year.

Released on Wednesday ahead of the company’s investor day, the guidance sent the stock down 2.1%.

Home Depot HD, -1.74%   expects sales and same-store sales growth of about 3.5% to 4%. The FactSet consensus is for sales and same-store sales growth of 4.3%.

Read: ‘Great Recession’ a decade ago is one reason our Christmas tree will cost more this year

The program, called “One Home Depot,” aims to create modern multiplatform shopping capabilities across both e-commerce and stores. The company will spend on store renovations, delivery, and investment in the company’s professional offerings.

Home Depot launched the three-year investment program in fiscal 2018. The home improvement retailer reiterated its fiscal 2019 guidance for sales growth of about 1.8%, same-store sales growth of 3.5%, and earnings per share of $10.03.

Credit Suisse analysts think it was time for Home Depot to reset its outlook in favor of a more conservative stance.

“[K]ey now is whether the company can 1) instill confidence that this could prove conservative, and that growth should reaccelerate in FY20 2) reassure that the investments are on plan, as we believe they are,” analysts said.

Credit Suisse rates Home Depot stock neutral with a $225 target price.

See: Amazon Prime members can place orders on Dec. 24 and get items by Christmas Day

Analysts were also shocked by the 14% fiscal 2020 operating margin guidance, which is below what was expected. Credit Suisse, which forecast 14.3%, attributes the shortfall to factors outside of the “One Home Depot” program.

“There have been new drags that emerged such as shrink and mix,” analysts said.

Instinet analysts led by Michael Baker agree. They say the lowered outlook may be due to its own investments as well as forces out of the company’s control.

“On the internal front, we believe several initiatives, while likely to pay off over time, may be taking a bit longer to execute,” Instinet said. “On the external side, since the original plan was given in 2017, Home Depot has seen more lumber deflation than expected and experienced margin pressure tariffs and shrink.”

Instinet rates Home Depot stock neutral with $237 price target.

Wedbush analysts say the “majority” of the margin decline is due to the company’s investment strategy. And while they’re confident that Home Depot is on the path to growth, the company’s failure to give longer-term guidance is a sign.

Watch: Here’s how much speedy delivery really costs

“[W]e believe that since the company is not providing a three-year financial outlook as it has at recent analyst meetings, it is more difficult to see returns on the investments it is making,” analysts wrote.

Wedbush rates Home Depot stock neutral with a $230 price target.

Home Depot stock has gained 23.1% for the year to date while the Dow Jones Industrial Average DJIA, -0.15%  has gained 19.3% for the period.