Will HD Supply Holdings Reach Sky-High Profits?

Source: Thinkstock

Source: Thinkstock

HD Supply Holdings Inc (NASDAQ:HDS) caught my eye as it approaches is new 52-week high. The company operates as an industrial distribution company primarily in North America. It operates in four segments: Facilities Maintenance, Waterworks, Power Solutions, and White Cap. The company distributes maintenance, repair, and operations products, including electrical and lighting items, plumbing products, HVAC products, appliances, janitorial supplies, hardware, kitchen and bath cabinets, window coverings, textiles and guest amenities, healthcare maintenance products, and water and wastewater treatment products. It also distributes fasteners, builders hardware, ropes and chains, and plumbing accessories; and kitchen cabinets, windows, plumbing materials, masonry, electrical equipment, lumber, flooring and tools, and tool rentals. It also provides power solutions, including pole line hardware, wires and cables, gears and controls, power equipment, fixtures and lighting, and meters. It offers water and wastewater transmission products, such as pipes, fittings, valves, fire protection, metering systems, storm drains, and hydrants, as well as offers fusion machine rental, and valve testing and repair services.

In addition, the company provides specialty construction products, such as concrete accessories and chemicals, tools, engineered materials and fasteners, safety products, and erosion and waterproofing products. Finally it offers floorings, cabinets, countertops, and window coverings, as well as provides design center services. It serves contractors, government entities, maintenance professionals, home builders, and industrial businesses in the maintenance, repair, and operations; infrastructure and power; and specialty construction markets. As building and home maintenance has resurged since the Great Recession, the stock has risen 48 percent in the last year and is currently just below its 52-week high of $28.87. Can the stock continue to push higher? An analysis of the company’s recent earnings suggests it can.

Net sales for the first-quarter of fiscal 2014 ended May 4, 2014 were $2.2 billion, an increase of $113 million, or 6 percent, as compared to the first-quarter of fiscal 2013. The first-quarter performance represents the sixteenth consecutive quarter of year-over-year average daily sales growth. The company believes its sales performance represents growth of approximately 400 basis points in excess of its market growth estimate. Gross profit increased $38 million, or 6 percent, to $631 million for the first-quarter of fiscal 2014 compared to $593 million for the first-quarter of fiscal 2013. Gross profit was 29.2 percent of net sales for the first-quarter of fiscal 2014, up approximately 20 basis points from 29.0 percent of net sales for the first-quarter of fiscal 2013. Gross profit improvement was driven by execution of the company’s category management initiatives and mix of products and services.

Operating income increased $18 million, or 18 percent, to $119 million for the first-quarter of fiscal 2014 compared to $101 million for the first-quarter of fiscal 2013. Operating income as a percentage of net sales increased approximately 60 basis points during the first-quarter of fiscal 2014 as compared to the first-quarter of fiscal 2013. The improvement was primarily driven by a reduction in selling, general and administrative expenses as a percentage of net sales, and improvements in gross margins. Adjusted earnings increased $25 million, or 15 percent, to $190 million for the first-quarter of fiscal 2014 compared to $165 million for the first-quarter of fiscal 2013. The increase in adjusted earnings was driven by Facilities Maintenance, Waterworks, and Construction & Industrial – White Cap, and reflects the continued focus on initiatives execution to drive growth in excess of the company’s estimate of market growth. Adjusted earnings as a percentage of net sales increased approximately 70 basis points to 8.8 percent in the first-quarter of fiscal 2014 as compared to 8.1 percent in the first quarter of fiscal 2013.