Home Depot Earnings: Tough Macro Environment Weighs on Sales Momentum

Home Depot Stock at a Glance

• Fair Value Estimate: $267
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

Home Depot Earnings Update

After incorporating wide-moat Home Depot’s HD tepid first-quarter results and tempered 2023 guidance, we plan to trim our $267 per share fair value estimate by a low-single-digit percentage, in line with the market’s reaction on the print. The company’s guidance is now calling for a 2%-5% decline in comparable sales after previously saying it would be flat, and predicting a 7%-13% drop in diluted EPS where before it called for a mid-single-digit decline. Still, shares appear a tad overvalued (trading at a roughly 5% premium to our existing valuation), and as such, we suggest investors remain on the sidelines.

During the quarter, Home Depot’s net sales fell 4.2% to $37.8 billion, including the unfavorable weather conditions and lumber deflation that accounted for half of the decline. A 4.8% drop in transaction count and flat comparable average ticket indicated lackluster demand. Customers took on smaller and less-discretionary projects because of inflation strains and macro pressures, leading big-ticket sales (those above $1,000) to decline 6.5%.

Nevertheless, we view softening demand as a natural progression toward moderating growth after lapping multiple years of pandemic-related demand. Compared with 2019, transaction count held flat at 391 million and pro backlog was higher (per management). On a positive note, Home Depot’s operating margin degraded a mere 30 basis points (to 14.9%) in the quarter relative to last year, which is evidence of the firm’s ability to employ diverse tactics to blunt sales deleverage while continuing to invest back into its business. The company can do this because of its operational agility and extensive scale (which underpin our wide moat rating).

Overall, near-term volatility doesn’t sway our long-term prognosis for the business. We believe continued investments (in supply chain, merchandising, product innovation, and associates) should help the firm maintain its market leadership position, supporting our projections for low-single-digit average sales growth and nearly 16% operating margins by 2032.