Home Depot Earnings: Despite a Stalled Housing Market, Operating Margin Preservation Persists

Key Morningstar Metrics for Home Depot

• Fair Value Estimate: $305.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Home Depot’s Earnings

Home Depot HD delivered first-quarter sales growth of 9.4%, buoyed by its acquisition of SRS, but same-store sales fell 0.3%, hurt by a 70-basis-point foreign exchange headwind. Despite struggling home turnover, the firm held its full-year outlook for sales growth of 2.8% and adjusted EPS 2% lower.

Why it matters: Although housing supply has improved modestly to four months, existing home sales remain subdued, falling 2.4% in March. We don’t expect either turnover or demand to pick up materially over the next few quarters, keeping Home Depot’s sales growth subdued.

• Interest rates appear to be the limiting factor in housing transactions. Morningstar’s average annual 30-year mortgage rate forecast doesn’t fall below 6% until 2026 from 7% currently, when faster growth could again result in cost leverage.
• We think Home Depot will continue to take share in its markets, particularly across the professional segment, as cross-selling opportunities abound and SRS takes the lead on the firm’s trade credit program. This should support long-term average annual sales growth of 4%.

The bottom line: We don’t plan any material change to our $305 fair value estimate for Home Depot and view shares as rich at 26 times our 2025 EPS estimate. We believe the premium multiple awarded to the best-in-class retailer is outsized to the 6% EPS growth we model over the next five years.

• We view the firm’s commitment to its everyday low-price strategy, which should continue to uplift the brand, as a key tenet underlying our wide moat rating. The pass through of savings to consumers will hold our gross margin outlook to around 33.5% over the next decade.
• The firm’s scale has helped it maintain its 2025 outlook, as sourcing diversification and negotiating leverage should help the adjusted operating margin reach 13.4%, down just 10 basis points despite tariffs. Fortunately, more than 50% of Home Depot’s products are sourced in the US.