Home Depot (HD) is due to report earnings before the market opens tomorrow. Analysts expected the home improvement retailer to report sales of $24.5B and EPS of $1.82 for Q3, although there is a higher degree of uncertainty due to the major hurricanes that impacted the U.S. during the quarter. We are looking for several pieces of news out of the company.

We expect to see a 5.3% gain in U.S. same-store sales. Shares of Home Depot are 7.3% since the last time the company reported earnings vs. a 5.8% return for the S&P 500 Index. We think shares will move higher if estimates are surpassed. So what are we looking for?

As mentioned above Revenues are expected to come in at $24.5 billion this quarter. If achieved, the +5.4% YOY increase would represent growth deceleration compared to last quarter’s +6.2% rate. With comps for the full year guided at a timid +5.3% after the first half of the year saw the metric reach +5.9%, we believe the Street’s top-line expectations could be topped, provided Home Depot can maintain transaction volume and pricing trending up as it has in the first couple of quarters of the year.

With management’s projection of a gross margin decline of 10 bps in 2017,we choose to keep our expectations for the third quarter conservative. But we would not rule out less impacting headwinds to profitability, as I believe Home Depot has been over-delivering on supply chain productivity so far this year. Opex is a lever that we believe the company will continue to pull. We project operating costs will account for just short of 20% of revenues, representing a 50-bp improvement over year-ago levels. Should decent top-line growth and potential op margin improvement materialize, cash generation will likely remain healthy, further helping to cushion the impact of the company’s highly-levered balance sheet.

After last quarter, Home Depot, which is a serial guidance raiser and is another reason we like this name long-term, raised guidance. Home Depot updated its fiscal 2017 sales guidance and expects sales will be up approximately 5.3% and comp sales will be up approximately 5.5%. It then raised its earnings per share guidance for the year to grow approximately 13% from fiscal 2016 to $7.29 (up from prior guidance of $7.15).

Finally the name is shareholder friendly. We would be remiss if we did not mention that the company recently gave us a nice raise of 29% to the dividend. In addition, it also recently announced an additional $15 billion buyback program. That is a winning combination. Home Depot consistently meets or beats expectations on many metrics. Bottom line, it’s a winner and you should be buying these dips.



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