Home Depot is the big winner in the downfall of Sears

Home Depot is taking market share from Sears, small hardware stores and other retailers, analysts say

Home Depot Inc. stands to be the biggest beneficiary of the troubles at Sears Holdings Corp., as the home improvement giant is winning the very business that Sears is losing.

Sears SHLD, -7.52% is losing business in key categories such as appliances, tools and outdoor products, creating a hole that Home Depot HD, +1.43% is ready to fill.

“While gains from Sears’ demise will spread among many retailers, it looks likely that Home Depot will take the biggest chunk of share in 2018,” wrote Neil Saunders, managing director of GlobalData Retail.

See also: Sears latest problem? It doesn’t have enough consumer electronics to sell

Edward Jones analysts say Home Depot has enjoyed market share gains for a number of years from small hardware stores, department stores and specialty stores.

“[W]e expect this to continue as they expand their online assortment and improve the online experience,” wrote lead analyst Robin Diedrich. “We also view this category of retail as much better insulated from online competitors due to the nature of home goods.”

Even if the category has a barrier to online encroachment, it’s not impervious to it. GlobalData’s Saunders says Home Depot has made “smart” investments in online capabilities.

“As much as online currently plays a relatively small role in home improvement purchasing, its influence is rising, and it is now becoming a more significant engine of growth across many categories,” he wrote. “Home Depot has created a proposition that ensures it is the go-to destination online and is successfully defending its business from the rise of Amazon AMZN, +0.38% and other internet players.”

See also: Kohl’s, Macy’s lost millions to hurricane closures, but their problems run deeper

While Home Depot’s third-quarter results were supported by natural disasters, including hurricanes, which created a need in “storm-related” categories, executives made sure to highlight the strength of the core business, which they say has thrived despite the weather pressures.

The weather actually hurt margins during the quarter. Home Depot says it saw increased demand as customers prepared for and started to recover from these natural disasters, but many sales were on lower margin items like plywood and generators with additional supply chain costs.

“So our gross margin on the hurricane-related sales was considerably less than our company average,” said Chief Financial Officer Carol Tome on the call, according to a FactSet transcript.

Home Depot had to shutter 236 stores and some distribution centers, with hurricane-related expenses totaling about $104 million.

Read: J.C. Penney’s turnaround has touched ever corner of the struggling department store

Home Depot reported sales of $25.02 billion, up from $23.15 billion last year and ahead of the $24.54 billion FactSet consensus. Earnings per share rose to $1.84 from $1.60 last year, beating the $1.82 FactSet estimate. And same-store sales were up 7.9%, and up 7.7% for the U.S. The FactSet consensus was for 5.3% growth.

Looking ahead, Edward Jones’ Diedrich said Home Depot has a long-term growth outlook of 10% because of strength in the housing and home improvement markets.

“In the long run, we expect home improvement spending to grow at an above-average rate versus retail sales overall, given improving expectations for new household formation, the reversing of pent-up demand caused during the recession, the replacement of the aging housing base, and lifestyle trends that favor more and larger kitchens and baths in the home,” she wrote.

Craig Menear, Home Depot’s chief executive, agrees the company’s future looks bright.

“From a macro perspective, we continue to see positive signs in the housing data which we believe serves as a tailwind for our business,” he said on the call. “[B]ecause of our outperformance in the third quarter and the expectation of additional sales from the rebuilding efforts associated with the storms, we are increasing our sales and earnings per share guidance for the year.”

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Home Depot is expecting sales growth of 6.3% and same-store sales growth of 6.5%. The FactSet consensus is for sales of $99.96 billion, up from $94.60 billion last year. FactSet is forecasting same-store sales growth of 5.8%.

Home Depot expects EPS growth of 14% from $7.36 last year. The FactSet estimate is for $7.33.

Home Depot shares are up 1.4% in Tuesday trading and up 31.3% for the last year. The S&P 500 index SPX, -0.23%  is up 19% for the past 12 months, and the Dow Jones Industrial Average DJIA, -0.13% is up 24.2% for the period.

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