Home Depot Earnings: Consumer Apprehension Crimps Sales, but Long-Term Algorithm Intact

Key Morningstar Metrics for Home Depot

• Fair Value Estimate: $270.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Home Depot’s Earnings

Home Depot HD echoed the sentiment of other consumer firms in the second quarter, noting weaker spending due to economic uncertainty. This surfaced in same-store sales declines of 3.3%, 150 basis points lower than our estimate, and an organic sales downtick of 2.4% (excluding recently acquired SRS). While comp transactions fell 2.2% and comp average tickets declined 1.3%, consumers are still seeking out innovative products, displaying the brand’s strength. Rather, we think the mix of transactions continued to weigh on metrics, shifting less favorably away from big-ticket sales (over $1,000), which were down 5.8% in the period.

We plan to lower our second-half estimates to incorporate continued consumer hesitance. In our model, this will result in same-store sales falling around 3%, below the flat performance we estimated preprint. Offsetting this, we expect to nudge our operating margin up from 13.4%, closer to the firm’s inaugural adjusted operating margin guidance including the SRS acquisition (13.8%-13.9%). As such, we don’t expect any material change to our fair value estimate of $270 per share, and we view the stock as rich, trading at around 20 times our 2025 EPS estimate.

We think category spending has been increasingly paralyzed by the rising probability of interest rate reductions, as consumers wait to finance bigger-ticket projects at lower costs. While Morningstar anticipates the Federal Reserve’s initial interest rate cut will likely occur in September, we don’t expect an immediate stimulus to demand and believe big-ticket renovation growth will resume in 2025. Therefore, we think it’s reasonable for Home Depot to return to its long-term algorithm for growth, which we forecast to include 3%-4% same-store sales growth, an operating margin that expands more than 100 basis points as the professional business scales, and mid-to-high-single-digit EPS growth (depending on share repurchases) over the next decade.