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Wide-Moat Home Depot's Growth Rationalizes in 2022

Fourth-quarter results were modestly ahead of our forecast.

We plan to increase our $244 fair value estimate for wide-moat Home Depot HD by a mid-single-digit rate after incorporating fourth-quarter results, an updated 2022 outlook, and time value into our model. However, we still view the shares as rich, even after a high-single-digit drop after the release. Fourth-quarter results were modestly ahead of our forecast, with $35.7 billion in sales (versus our $34 billion estimate) and $3.21 in EPS (versus $3.15), bolstered by 8% same-store sales. Comparable average ticket rose 12.3%, with two thirds of the jump from inflation, while transactions declined 3.8%. While two-year stacked comp growth of 33% remains impressive, the metric is likely to start decelerating materially in the second quarter. We don’t think demand for home projects is set to stall, but the pandemic stepped sales up to a structurally higher base for more normalized growth going forward.

Home Depot offered its inaugural 2022 forecast for flat to slightly positive sales and comp growth, flat operating margin (15.3%), and low-single-digit EPS. While the top-line outlook was a bit lower than our preprint 2.5% forecast, the operating margin projection was a tad higher than our 14.9% estimate, leaving little impact on our intrinsic value. We’ve long held that the normalized growth rate of the business would be lower than experienced during the pandemic, and as such, we plan to maintain our long-term valuation drivers, which include average 4% sales growth and 15%-16% operating margins. This should allow Home Depot to surpass its goal of $200 billion in sales by 2029 (no committed timeline was offered). We expect operating margin upside will be constrained by the firm’s intent to spend to enforce its market leadership position, a factor we see as imperative to support its brand intangible asset. We don’t foresee any major strategy changes in the near term as Home Depot continues to capitalize on an already successful strategy.

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