Home Depot's stock bounces as home improvement demand may have just bottomed

By Tomi Kilgore

Quarterly comparable sales missed and the full-year outlook was cut, but lower interest rates could spark interest in large projects

Shares of Home Depot Inc. reversed into the green on Tuesday, after the home improvement retail giant reported fiscal second-quarter comparable sales that were worse than forecasts, but implied that lower interest rates could spark interest in large projects.

The company also provided a downbeat full-year outlook for profit and lowered its outlook for comparable sales growth, but raised its growth guidance for total sales.

"During the quarter, higher interest rates and greater macroeconomic uncertainty pressured consumer demand more broadly, resulting in weaker spend across home improvement projects," said Chief Executive Ted Decker.

"Additionally we saw continued softness in spring projects, which were also impacted by the extreme weather changes throughout the quarter," Decker said on the post-earnings call with analysts, according to an AlphaSense transcript.

The company also indicated that there has been less demand for larger home-improvement projects that need financing, as people are waiting for a drop in interest rates to make them cheaper.

More recently, increased political "noise" and growing worries about the economy, as unemployment has ticked up, has caused people to push "pause" on larger projects.

"Everyone's expecting rates are going to fall, so [they're] deferring those projects," Decker said.

Read: With a September rate cut seen as a virtual done deal, questions turn to how far and how fast the Fed will ease.

One interesting comment Decker made on the call about consumer behavior was that the post-pandemic shift in spending, first from buying up home goods such as grills and patio furniture, then to services and experiences as the pandemic ended, was effectively complete.

"The relative share of spend is more or less equal to where it was before the pandemic," Decker said.

The stock (HD) rose 0.2% in morning trading, to reverse earlier losses of as much as 1.9% after the opening bell, and of as much as 4.9% in premarket trading.

D.A. Davidson analyst Michael Baker comparable sales miss and lowered outlook wasn't exactly a surprise given the current environment, and he reiterated his buy rating as he believes the worst is now in the past.

"[W]e think this should be the bottom with respect to downward revisions, which is a bullish catalyst in our view, particularly as the stock historically performs well during Fed easing cycles," Baker wrote in a note to clients. "Therefore, we believe any weakness associated with the print today should, and will be, bought."

Net income for the quarter to July 28 fell to $4.56 billion, or $4.60 a share, from $4.66 billion, or $4.65 a share, in the same period a year ago.

Excluding nonrecurring items, adjusted earnings per share of $4.67 beat the FactSet consensus for earnings per share of $4.53, to mark the 18th straight quarterly beat.

Net sales rose 0.6% to $43.18 billion from $42.92 billion, while the FactSet consensus was for a decline to $42.57 billion. The results include $1.3 billion in sales from SRS Distribution Inc., as the acquisition closed about six weeks before the end of the quarter.

Comparable sales, or sales of stores open at least a year, declined 3.3%, which was worst than the FactSet consensus of 2.2% decline, as the number of transactions were down 2.2% and average ticket was 1.3% lower.

In the U.S., comparable sales fell 3.6% compared with expectations of being down 2.5%.

Big-ticket comparable transactions, or those of over $1,000, fell slumped 5.8%.

"We continued to see softer engagement in larger, discretionary projects where customers typically use financing to fund the project such as kitchen and bath remodels," said Billy Bastek, executive vice president of merchandising.

For the full fiscal year, the company expects adjusted EPS to decline between 1% and 3%, while the current FactSet EPS consensus of $5.16 implies 0.3% growth. For comparable sales, the company now expects a decline between 3% and 4%, compared with previous guidance of a decline of approximately 1%.

For total sales, however, which includes the impact of the SRS acquisition, the growth outlook was raised to between 2.5% and 3.5% from growth of approximately 1%.

The stock was down less than 0.1% year to date, while the Consumer Discretionary Select Sector SPDR ETF (XLY) has slipped 1.8% and the Dow Jones Industrial Average has gained 4.6%.

-Tomi Kilgore

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08-13-24 1056ET

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