Home Depot Earnings: Lingering Macro Concerns Pressure Big Tickets, but Brand Cachet Intact

Home Depot Stock at a Glance

• Fair Value Estimate: $263.00
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

Home Depot Earnings Update

Although fiscal 2023 appears to be a year of moderation for Home Depot HD, its second-quarter results were solid. The firm’s $42.9 billion in revenue (down 2%) and $4.65 in diluted earnings per share outstripped our preprint estimates of $42.1 billion and $4.45, respectively.

Incorporating the outperformance, time value, and its reaffirmed guidance of a 2%-5% decline in sales and a 7%-13% drop in diluted EPS (versus our respective forecasts of 3% and 8% declines), we are increasing our fair value estimate for Home Depot stock to $263 from $259. However, we think market expectations are lofty and shares seem to be priced for perfection, trading roughly 25% north of our intrinsic valuation. As such, we’d suggest investors remain on the sidelines.

Comparable store sales ticked down 2%, with a 1.8% drop in transactions and flat average ticket growth (including a 160-basis-point headwind from lumber deflation). More critically, big-ticket transactions (purchases over $1,000) fell 5.5%, reflective of softer consumer sentiment as they opted to take on smaller, less-discretionary projects. Still, pro sales outpaced DIY sales in the quarter (qualitatively stated), with pro backlogs hovering well above the historical average, albeit at a lower level sequentially. On a positive note, management highlighted benefits witnessed from its $1 billion wage investment for front-line workers (which we’ve viewed as essential to support its brand intangible asset), with improved attrition rates, staffing levels, and productivity resulting in higher customer satisfaction.

Looking ahead, we believe the pro business (nearly half of the firm’s sales) will remain Home Depot’s key growth driver, as it intends to capture incremental share by expanding its reach to complex pros while prudently investing in merchandising and technology, giving us confidence in our 4% average sales growth by fiscal 2032 (beyond fiscal 2023). Still, continued investment bounds our long-term operating margin outlook at 15%-16%.