Company Reports

Home Depot is the world's largest home improvement retailer, delivering $153 billion in revenue in 2023. The firm's wide economic moat rating is based on its economies of scale and brand equity. While Home Depot has realized strong historical returns as a result of its scale, operational excellence and concise merchandising, all of which remain key tenets underlying our modest margin expansion forecast. Its flexible distribution network should help elevate the firm's brand intangible asset, with faster time to delivery improving the do-it-yourself (DIY) experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above prepandemic levels in the longer term, despite near-term inflationary pressures and economic turbulence.

In recent years, a multitude of macro factors, such as low housing turnover and elevated interest rates, have weighed on Home Depot’s results, and fiscal 2024's first quarter was no exception. Comparable-store sales dropped 2.8%, near our negative 3% prerelease estimate, with comparable transactions and average tickets declining 1.5% and 1.3%, respectively. Pressures were more evident in big-ticket comp transactions (purchases over $1,000, down 6.5%), suggesting continued softness in larger discretionary projects. Nevertheless, we still believe that wide-moat Home Depot is poised to return to growth as it continues to invest prudently to enhance diverse facets of its business. We think improvements in in-stock position, return flexibility, and online shopping experience will ensure its competitive strengths remain intact. Importantly, we don’t anticipate a long wait before Home Depot enters positive comp growth territory; we expect growth to return toward the back of the year as consumer engagement normalizes in discretionary pull-forward categories (resulting in a 1% drop for the full year), which squares with the firm’s reaffirmed outlook. As we balance the first-quarter results, time value, and reiterated guidance, we don’t plan any material change to our $263 fair value estimate. The shares continue to appear highly overvalued, and we’d suggest investors remain on the sidelines.

Home Depot announced a deal to acquire SRS Distribution, a residential pro trade distributor specializing in roofing, landscape, and pool verticals. Marking the largest deal in the retailer’s history, Home Depot plans to finance the $18.25 billion transaction (set to close in fiscal 2024) with a combination of cash and debt. The deal values SRS at 16.1 times 2023 adjusted EBITDA, which strikes us as a touch rich relative to the roughly 15 times EBITDA it paid for HD Supply back in 2020. That said, if we were to incorporate the financial impact of the SRS Distribution deal into our existing Home Depot model (including the $18.25 billion price tag, increased debt that raises leverage to around 2.5 times, and higher interest expense), our $263 fair value estimate would change minimally. Considering the uncertainty around the timing or closure of this deal due to potential anti-trust issues, we plan to incorporate SRS into our model as we obtain more visibility. Home Depot’s shares continue to appear overpriced, and we’d suggest investors remain on the sidelines. More critically, we don’t anticipate this transaction will sway our long-term prospects for low-single-digit top-line growth and midteens operating margins, particularly as SRS would increase Home Depot’s sales base by 6.5%.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Home Depot is the world's largest home improvement retailer, delivering $153 billion in revenue in 2023. The firm's wide economic moat rating is based on its economies of scale and brand equity. While Home Depot has realized strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying our modest margin expansion forecast. Its flexible distribution network should help elevate the firm's brand intangible asset, with faster time to delivery improving the do-it-yourself (DIY) experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above prepandemic levels in the longer term, despite near-term inflationary pressures and economic turbulence.

Wide-moat Home Depot’s tepid fourth-quarter results reflect macro pressures that include slow housing turnover and elevated mortgage rates. Net sales dropped 2.9% to $34.8 billion, and diluted earnings per share came in at $2.82, largely in line with our forecast. The top-line decline was a byproduct of weaker customer transactions and average ticket, which contracted by 1.7% and 1.3%, respectively. Big-ticket purchases (over $1,000) were especially slow, declining 6.9%. The firm expects housing headwinds will persist, leading to 1% declines in both comparable sales and EPS (excluding the 53rd week) in fiscal 2024. We intend to lower our 2024 growth forecasts of 2% for sales and 7% for EPS but don’t plan any material change to our long-term outlook or our $263 fair value estimate. As such, we continue to view the shares as overvalued, trading at a 28% premium to our existing intrinsic valuation, and consider their recent surge (nearly 20% over the past three months) as overdone. We believe the current share price implies expectations that far exceed our forecast for 4% annual sales growth beyond fiscal 2024 and nearly 16% operating margins, which considers the mature phase of the industry’s growth cycle.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

Home Depot is the world's largest home improvement retailer, set to deliver an estimated $153 billion in revenue in 2023. The firm earns a wide economic moat rating due to its economies of scale and brand equity. While Home Depot has realized strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying our modest margin expansion forecast. Its flexible distribution network should help elevate the firm's brand intangible asset, with faster time to delivery improving the do-it-yourself (DIY) experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above prepandemic levels in the longer term, despite near-term inflationary pressures and economic turbulence.

We don’t plan a material change to our $263 fair value estimate for Home Depot as its third-quarter marks 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 Home Depot’s strategic EDLP 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 negative 3% and negative 8% respective preprint estimates. Trading roughly 6% higher on broad market strength, shares still strike us as rich, trading roughly 16%-17% north of our existing intrinsic valuation.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Although fiscal 2023 appears to be a year of moderation for wide-moat Home Depot, its second-quarter results were solid—$42.9 billion in revenue (down 2%) and $4.65 in diluted EPS outstripped our $42.1 billion and $4.45 preprint estimates, respectively. Incorporating the outperformance, time value, and its reaffirmed guidance of 2%-5% decline in sales and 7%-13% drop in diluted EPS (versus our respective forecasts of 3% and 8% declines), we are increasing our fair value estimate by a low-single-digit percentage 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.

Home Depot is the world's largest home improvement retailer, set to deliver $153 billion in revenue in 2023. The firm earns a wide economic moat rating due to its economies of scale and brand equity. While Home Depot has realized strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying our modest margin expansion forecast. Its flexible distribution network should help elevate the firm's brand intangible asset, with faster time to delivery improving the do-it-yourself (DIY) experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above prepandemic levels longer term, despite inflationary pressures and near-term economic turbulence.

At its June 13 investor day, we confirmed our belief that Home Depot’s firm commitment to funnel investments into diverse facets of its business (technology, stores, merchandising, product innovation) should help it to maintain its market leadership position and brand strength, underpinning our wide moat rating. While fiscal 2023 looks challenging due to a tough macroeconomic backdrop and softening demand (we forecast 3% decline in sales and 9% drop in diluted EPS, both within the guided range), fundamental demand drivers for the home improvement market (home equity and aging housing stock) remain favorable. As we maintain our long-term prognosis for the business (low-single-digit average top-line growth and midteens operating margins by fiscal 2032), we don’t plan a material change in our $259 fair value estimate. Shares continue to strike us as rich, trading at a 15% premium.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

Home Depot is the world's largest home improvement retailer, set to deliver $153 billion in revenue in 2023. The firm earns a wide economic moat rating due to its economies of scale and brand equity. While Home Depot has realized strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying our modest margin expansion forecast. Its flexible distribution network should help elevate the firm's brand intangible asset, with faster time to delivery improving the do-it-yourself (DIY) experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above prepandemic levels longer term, despite inflationary pressures and near-term economic turbulence.

After incorporating wide-moat Home Depot’s tepid first-quarter results and tempered 2023 guidance (now calling for a 2%-5% decline in comparable sales and a 7%-13% drop in diluted EPS from flat and a mid-single-digit decline, respectively), 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. Still, shares appear a tad overvalued (trading at a roughly 5% premium to our existing valuation), and as such, we’d suggest investors remain on the sidelines.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

Home Depot is the world's largest home improvement retailer, set to deliver $158 billion in revenue in 2023. It continues to benefit from a healthy long-term housing dynamics and improvements in its merchandising and distribution network. The firm earns a wide economic moat rating due to its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying our modest margin expansion forecast. Its flexible distribution network will help elevate the firm's brand intangible asset, with faster time to delivery improving the do-it-yourself experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above prepandemic levels longer term, despite inflationary pressures.

We don’t plan any material change to our $270 per share fair value estimate for wide-moat Home Depot after considering a fourth quarter that was largely in line with our forecast and a moderating prognosis for 2023. Fourth-quarter sales of $36 billion matched our projection, and EPS of $3.30 edged our forecast by three pennies. Same-store sales contracted 30 basis points, with ticket up 5.8% and transactions down 6%, as higher prices appear to be having an impact on demand elasticity. We surmise the ticket and transaction algorithm will normalize at a low-single-digit rate over time as inflation moderates but that 2023 has some risk given the firm’s initial guidance for flat same-store sales growth—a tad below our preprint growth projection of 3.5%. In our opinion, both a slowing top line and operating margin compression (as the firm invests in the employee base) were key factors in the 5% share decline, but we still view shares as modestly overvalued, trading at a 10% premium.

Home Depot is the world's largest home improvement retailer, on track to deliver $157 billion in revenue in 2022. It continues to benefit from a healthy long-term housing dynamics and improvements in its merchandising and distribution network. The firm earns a wide economic moat rating due to its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying our modest margin expansion forecast. Its flexible distribution network will help elevate the firm's brand intangible asset, with faster time to delivery improving the do-it-yourself experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above prepandemic levels longer term, despite inflationary pressures.