Important points
-
Home Depot beat second-quarter earnings expectations despite a year-over-year EPS decline.
-
The company lowered its fiscal year 2024 forecast due to macroeconomic factors hurting its business.
-
Is Home Depot stock a buy?
The home improvement retailer beat earnings expectations for the quarter but lowered its forecast for the rest of the year.
Home Depot (NYSE: HD) fell slightly more than 1% after the close on Tuesday, but recovered by late morning after the market had time to digest the home improvement retailer’s second-quarter results.
The wholesaler beat its earnings forecast for the quarter, reporting net sales of $43.2 billion, up 0.6% year over year and beating Wall Street’s estimate of $42.6 billion.
Net income fell 2.1% to $4.56 billion, or $4.60 per share, but earnings beat estimates of $4.53 per share.
Earnings were solid but by no means strong. And the outlook was even worse, with Home Depot lowering its guidance for fiscal 2024.
Comparable sales decline in the quarter
While overall revenue increased, those figures also include approximately $1.3 billion in revenue from Home Depot’s recent acquisition of SRS Distribution, a roofing and building products distributor.
Comparable, or same-store, sales actually declined 3.3% in the quarter compared to the second quarter of 2023. And in the U.S., comparable sales declined 3.6%.
Home Depot CEO Ted Decker said the difficult economic environment has taken its toll, particularly in the housing sector.
“Higher interest rates and greater macroeconomic uncertainty put pressure on consumer demand overall during the quarter, leading to lower spending on home improvement projects,” Decker said.
Worsening prospects
Home Depot’s management does not expect the situation to improve anytime soon, which is why the company has lowered its forecast for comparable store sales in fiscal 2024.
Home Depot now expects comparable sales to decline between 3 and 4 percent for the full year, a larger decline than the previous forecast for a 1 percent decline in comparable stores.
A 3% decline implies a consumer demand environment consistent with the first half of fiscal 2024, while a 4% decline would imply increasing pressure on consumer demand.
During the conference call on the quarterly results, the managers noted that comparable store sales were better in August than in July.
In addition, the gross margin forecast for fiscal year 2024 was reduced from 33.9% to 33.5%.
In addition, earnings per share growth in 2024 is now expected to be 2% to 4% lower than the previous guidance of 1% EPS growth. This is partly due to net interest expense, which is expected to be significantly higher ($2.2 billion) than the previous guidance of $1.8 billion. In the second quarter, interest expense rose 22% as interest rates remained high and unchanged.
However, the company increased its revenue forecast thanks to SRS, which is expected to bring in revenue of $6.4 billion. Net sales are now expected to grow between 2.5 and 3.5 percent, compared to an estimated growth of 1 percent in the previous forecast.
Is Home Depot stock a buy?
Home Depot stock trended higher throughout the rest of Tuesday, and was up about 1% by noon Eastern Time. The stock has risen about 1% since the beginning of the year.
Given the muted outlook for comparable sales, Home Depot shares don’t seem like a particularly worthwhile buy. The median price target is $390 per share, which represents an 11% upside from the current price.
But given the bleak outlook and a P/E ratio that has risen to 23, I don’t think Home Depot is a good investment either.
There are certainly better alternatives in retail and elsewhere.
