Home Depot Earnings: Unsettled Macro Pinches Demand, Posing Near-Term Pressures

Key Morningstar Metrics for Home Depot

• Fair Value Estimate: $263.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Home Depot’s Earnings

We don’t plan a material change to our $263 fair value estimate for Home Depot HD, as its third-quarter results were near our forecasts. Specifically, $37.7 billion in net sales closely matched our $37.8 billion estimate and $3.81 in diluted EPS eclipsed our $3.72 preprint forecast, leading to 20 basis points of operating margin upside from our forecast.

Results were helped by the firm’s strategic everyday low pricing tactics and its ability to blunt sales deleverage through enhanced productivity and agile execution (factors that underpin our wide moat rating). The firm’s updated full-year guidance now calls for a 3%-4% drop in net sales (from 2%-5%) and a 9%-11% decline in diluted EPS (7%-13% prior), largely in line with our respective preprint estimates of -3% and -8%. Trading roughly 6% higher on broad market strength, shares still strike us as rich, trading roughly 16%-17% north of our existing intrinsic valuation.

Unpacking the top-line performance, comparable sales fell 3.1%, driven by a 2.7% downdraft in transaction count and flat average ticket growth. Mirroring the prior quarter, pressures extended in big ticket items (down 5.2%) and discretionary categories (such as flooring, countertops, and cabinets), reflecting the murky macro backdrop and soft consumer behavior we anticipate will push into 2024.

Still, pro strength persisted (backlog remains healthy and it outperformed the DIY cohort, realizing flat growth after normalizing commodity headwinds), and we continue to believe that pro will serve as the firm’s core growth vector. In this context, we believe the firm’s efforts to better cater to complex pros through expanding its outside sales team, building out capabilities, and enhancing service levels while leveraging its robust scale and distribution network should drive meaningful share gains in this underpenetrated market, providing confidence in our predictions of 4% sales growth over the next decade and nearly 16% long-term operating margins.