Home Depot: Judicious Investments Set To Support Brand Prowess and Low-Cost Position

At its June 13 investor day, we confirmed our belief that Home Depot’s HD 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. The shares continue to strike us as rich, trading at a 15% premium.

Home Depot’s plan to elevate its pro ecosystem through targeting “complex pros”—largely renovators and remodelers, representing a $200 billion market where Home Depot remains underpenetrated—seems prudent. With dedicated sales professionals, we believe Home Depot’s one-stop-shop value proposition should resonate with this cohort that normally sources from 10-plus suppliers for a single project. Given the nearly 350 basis points of outperformance it has witnessed in its Dallas pilot market, we think Home Depot can further cross-sell its wide array of product categories as it targets another 40 markets across the U.S. over time, while leveraging its pro loyalty program, digital tools, and fulfillment infrastructure. That said, considering our limited visibility on such rollouts, we maintain our 3%-4% consolidated annual sales growth forecast. Further, we expect the 80 new stores Home Depot aims to open over the next five years to relieve high-volume stores and enhance the customer experience. Taken together, these investments should amount to 2% of sales, in line with historical levels.