This week will big for retail, as multiple major names are reporting earnings results. Home Depot (NYSE:HD) should give us a clue to the state of the housing market, in terms of home investments. Kohl’s (NYSE:KSS) will show us how brick-and-mortar clothing is faring. And we’ll get to see if Target (NYSE:TGT) can continue the nice run it’s been on.
Home Depot: Nov. 19
Home Depot is arguably one of the best investments you could have made over the past decade. Since the end of 2011, shares have handily outpaced the S&P 500. More recently, however, analysts have begun to grow more cautious on the home-goods titan. Guggenheim downgraded the stock to “neutral” in September, based on concerns that the company’s investments in stores, online growth, and the supply chain would hamper margin.
One could debate the short-term pain versus the long-term merits of investing $5.4 billion into the business. But as I see it, it certainly beats spending money on share buybacks, something that Home Depot has a habit of doing. Larger concerns arise from the health of the balance sheet, as Home Depot was running a total stockholder deficit of $1.16 billion at the end of the second quarter. While sales revenue has rose 3.3% through the first half of the year, and net income is up 1.4%, one must wonder what will happen to the shares if things were to slow down.
Because of the weakness on the balance sheet, Home Depot can’t afford to miss on guidance. With the stock perched at an all-time high, the home-goods retailer needs to show top-line sales growth, along with earnings that at least satisfy estimates.
The company provided full-year guidance for 3.1% growth in earnings per share. The guidance implies a valuation of about 23.7 times forward full year earnings potential. That’s not a bad valuation, but it remains countered by that deficit in shareholder equity. It’s tough to be too bullish on a stock that commands a market capitalization of $260.5 billion when the company has no real equity behind it.
Kohl’s: Nov. 19
Kohl’s has had a tougher year than it did in 2018. Through the first six months, the department store chain struggled to grow total revenue, which declined 3%. Comparable sales, meanwhile, fell 3.2%. However, in the second-quarter earnings release, CEO Michelle Gass noted that Q2 comp sales were better than in Q1 and had risen 1% in the final six weeks. She further noted that the positive trend had carried into August, with the help of back-to-school shopping.
Kohl’s is banking on success from the returns deal it has with Amazon.com (NASDAQ:AMZN). Allowing customers to return items ordered online to Kohl’s stores creates the potential for greater store traffic.
Beating earnings estimates is always good, but I think the attention will be on comparable-store sales. Retail seems to be all about who is gaining or losing market share right now, so look for specific mentions of store traffic. Also watch the balance sheet, as Kohl’s has been working hard to drive down its long-term debt. The balance sheet was healthy, with $5.45 billion in shareholder equity at the end of the second quarter.
Analysts are expecting earnings of $0.86 per share…
Target: Nov. 20
Retailers that can balance online sales with continued brick-and-mortar strength are the names to own, and Target is succeeding in driving same-store sales in a time when…
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