HD Earnings Preview- A check on discretionary spending
AInvestMonday, Aug 12, 2024 11:44 am ET
3min read
HD --
SRS --
UBS --

Home Depot (HD) is scheduled to report its Q2 earnings on August 13, 2024, before the market opens. The consensus estimate among analysts is for earnings per share (EPS) of $4.55, slightly down from $4.65 in the same quarter last year. Revenue expectations for the quarter are robust, reflecting an increase in full-year estimates over the past 90 days, with projections now reaching $158.88 billion for 2024. However, earnings estimates have been revised downward slightly, indicating some caution among analysts regarding profitability amid a challenging economic environment.

Key metrics to watch in the upcoming report include comparable store sales, transaction counts, and average ticket size, as these will provide insights into consumer spending patterns and the impact of macroeconomic factors like high mortgage rates and inflation. Analysts are particularly focused on the potential impact of the recently completed acquisition of SRS Distribution, which is expected to contribute to Home Depot's Pro business. This segment is crucial as it serves contractors and professionals engaged in more complex projects, potentially providing a competitive edge over rival Lowe's.

Ahead of the earnings release, analysts have been adjusting their expectations. UBS analyst Michael Lasser anticipates softer-than-expected sales and suggests that Home Depot might adopt a more conservative outlook for the remainder of the year due to continued pressure in the housing market. Stifel analysts also revised their estimates, highlighting potential noise in the results due to the mid-quarter acquisition of SRS Distribution. They noted a potential $0.50 negative impact on FY25 EPS from the acquisition, which could introduce variability in consensus estimates.

Despite these adjustments, the overall sentiment remains cautiously optimistic. While some firms like TDCowen and Truist have trimmed their Q2 same-store sales estimates, they maintain a positive long-term outlook for Home Depot. Truist, for example, continues to support a "Buy" rating, though it lowered its Q2 U.S. comp estimates due to softer card data trends. Analysts generally expect that home improvement activity will eventually reaccelerate, but the timing remains uncertain, particularly as the housing market shows mixed signals.

In Q1, Home Depot faced challenges from sluggish demand for home renovation and repair projects, compounded by unfavorable weather conditions. CEO Ted Decker noted that after a surge in demand during the pandemic, the company is now experiencing a "year of moderation," with 2024 likely to mirror 2023. High inflation and rising interest rates have further dampened the housing market, leading to a 2.8% decrease in comparable store sales for Home Depot, with declines in both the number of transactions and average ticket size. Additionally, the company saw continued softness in big-ticket discretionary categories like outdoor furniture and appliances, impacted by a delayed start to the spring season.

Despite these headwinds, Home Depot gained market share in its Pro business, bolstered by its $18.25 billion acquisition of SRS Distribution. This acquisition is expected to expand Home Depot's leadership position, particularly in complex jobs handled by contractors, and increase its total addressable market by approximately $50 billion. Although growth is expected to remain sluggish in the near term, Home Depot's reaffirmation of its FY25 EPS, revenue, and comp guidance suggests confidence in stabilizing sales trends. The company is well-positioned to benefit from pent-up demand in the home improvement category once the housing market improves.

The Home Depot's acquisition of SRS for $18.25 billion (announced on March 28) is set to enhance its growth with residential professional customers, expanding its reach into complex renovation and remodeling projects and establishing it as a leading specialty trade distributor across various verticals. With this acquisition, The Home Depot's total addressable market is estimated to increase to approximately $1 trillion. The transaction, expected to close by the end of fiscal 2024, will be funded through cash and debt, and while it may be dilutive to GAAP earnings-per-share due to amortization, it is expected to be accretive to cash EPS in the first year post-closing. Investors will want to hear updates on this merger.

In conclusion, Home Depot's Q2 earnings report is likely to reflect the broader challenges facing the home improvement sector, including sluggish consumer spending and a weak housing market. However, the company’s strategic moves, such as the SRS acquisition, could provide long-term growth opportunities. Analysts are keeping a close eye on how these factors will impact Home Depot's performance in the second half of the year, with many adopting a cautiously optimistic stance on the company's ability to navigate these headwinds.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.