Home Depot Invests to Defend Its Competitive Edge, Compressing Near-Term Profitability

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.