Home Depot Tops Earnings Estimates, Launches $15 Billion Stock Buyback

Analysts had expected a profit of $4.45 a share from $42.2 billion in revenue, according to consensus estimates from FactSet.

The company authorized a new $15 billion share repurchase program, replacing its previous buyback plan.

“While there was strength in categories associated with smaller projects, we did see continued pressure in certain big-ticket, discretionary categories. We remain very positive on the medium-to-long term outlook for home improvement and our ability to grow share in a large and fragmented market,” CEO Ted Decker said in a company statement.

Home Depot shares were down 0.8% in premarket trading on Tuesday. The stock was up 4.5% this year so far through to Monday’s close.

This is breaking news. Read a preview of Home Depot’s earnings below and check back for more analysis soon.

Home Depot reports earnings Tuesday. Don’t expect a blowout quarter, analysts say.

Wall Street is expecting Home Depot will post a profit of $4.45 a share from $42.2 billion in revenue, according to consensus estimates from FactSet. Same-store sales, a measure of revenue growth in stores open for at least a year, are projected to decline by 3.9%.

How the numbers turn out could offer clues about the outlook for other gigantic retailers. While some smaller chains have disclosed numbers, Home Depot is the first of the big-box stores to do so. Target (TGT),

Walmart

(WMT), and Lowe’s (

LOW

) will follow in the next two weeks.

There is a good chance that Home Depot’s results will meet expectations, analysts say, but with higher interest rates discouraging Americans from making big-ticket purchases, such as buying and remodeling a house, it may be unrealistic to expect a rally following the results.

Management lowered their financial forecasts for the fiscal year ending in January when it reported its first-quarter results, which helped reset expectations. Home Depot currently expects fiscal-year sales to decline from 2% to 5% from the year before, while earnings per share will fall between 7% and 13%. The company reiterated the forecast at a June investor day, making it less likely that it will cut its prediction again this quarter.

“HD/LOW already took their medicine by cutting post Q1,” wrote

Wells Fargo

analyst Zachary Fadem in a note to clients. Fadem has a Buy rating and $345 price target on the stock, while the shares closed at $329.95 on Monday afternoon. lagging behind the

S&P 500
with a gain of 4.5% in 2023.

This is a year of “moderating demand,” Home Depot’s management team said in June. The housing market is making a sluggish recovery, with higher interest rates keeping potential buyers on the sidelines. Add in the effects of inflation, and people are less eager to invest in home-improvement projects, wrote Wedbush analyst Seth Basham. Harvard’s Leading Indicator of Remodeling Activity predicts that annual expenditures for home improvement will decline at an “accelerating rate” through the first half of 2024.

“The ongoing reductions in household moves will cause a decline in the remodeling and repair activity that typically occurs around the time of a home sale,” said Carlos Martín, project director of the remodeling futures program, in a July press release. “The magnitude of the impact may be offset if owners who are locked into their current homes with ultra-low mortgage rates continue to renovate to meet changing needs or take advantage of new federal incentives for energy-efficiency retrofits.”  

Results from other companies in the home improvement sector paint a similar picture for softer consumer demand in North America. Floor and Décor’s (FND) management cut its forecasts for the fiscal year,

Masco

(MAS) said North American plumbing demand is “soft,” and

Whirlpool

(WHR) noted that appliance demand in the second quarter was flat.

A positive for Home Depot is that some of these companies reported stronger demand in their professional businesses, which cater to contractors, than in the do-it-yourself sector. About half of Home Depot’s revenue comes from sales to construction pros, which TD Cowen’s Mak Rakhlenko believes is beneficial because construction backlogs in the past year have kept demand afloat in that area. Rakhlenko maintained an Outperform rating ahead of the earnings report and raised his price target to $380 from $360.

But even that positive factor may be fading. The National Association of Home Builders recently reported that backlogs are declining. And in the latest quarter, Home Depot’s do-it-yourself operation outperformed its Pro business as people shift from large-scale remodeling work to smaller projects. Competitor Lowe’s is also expanding market share among contractors and is steadily catching up to Home Depot.

Investors will be listening to any commentary from management on the state of the Pro business, including backlogs of work, as well as updates on how the economic environment is affecting demand from both contractors and do-it-yourself customers.

Analyst sentiment has grown more cautious on the shares in recent months. As of Monday, 54% of analysts rated the shares at Buy, down from 71% last August. The number of Hold ratings, meanwhile ticked up to 43% from 29% a year ago. Three percent of analysts rate the stock at Underweight or Sell.

The low number of Sell ratings suggest that Wall Street is still upbeat on the stock in the long run. Home reinvestment is supported by an aging U.S. housing stock: More than half of houses were built before 1980, points out Wells Fargo’s Fadem.

“This should keep repair and maintenance spending levels in check (i.e., stable) for 2023,” he wrote.

Write to Sabrina Escobar at sabrina.escobar@barrons.com