Housing Fundamentals Support Sales at Home Depot

As key home improvement factors have remained supportive in recent periods (including turnover, rising prices, and low interest rates), wide-moat retailer

The firm’s current outlook implies the same-store sales growth will slow over the remainder of 2017 to a mid-single-digit pace (around 5%), which we still view as impressive, given the rather lengthy housing cycle upswing and the maturity of this particular business model. However, in the longer term and over cycles, we forecast Home Depot same-store sales averaging around 3%, leading to operating margins that rise to more than 16% over our forecast, from 14.2% in 2016. We view Home Depot as a best-of-breed business that should continue to benefit from a still-rising headship rate, household formations, and existing home sales, which should remain on the upswing for the next few years, before normalizing at a lower pace over the long term (including top-line improvement of 3% and 10 basis points of operating margin expansion over the last five years of our forecast).

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