HD shares trading higher on improved outlook
2min read Home Depot (HD) delivered stronger-than-expected Q3 FY24 results, with adjusted EPS of $3.78 surpassing the consensus estimate of $3.66. Total revenue grew by 6.6% year-over-year to $40.22 billion, beating expectations of $39.29 billion. Comparable sales declined by 1.3%, a smaller drop than the anticipated 3.1% decline, while U.S. comparable sales fell just 1.2%, showing a marked improvement from last year’s 3.5% drop. This outperformance in comps was driven by improved customer engagement with seasonal products and increased spending on items needed for hurricane recovery efforts.
Customer transaction trends showed resilience, with transactions down just 0.2%, outperforming the expected 2.09% decline. However, average ticket size declined by 0.8% year-over-year to $88.65, slightly missing the estimate of $90.72. This reduction in ticket size reflects reduced inflationary pressure on big-ticket items, with customers remaining cautious about discretionary spending. Sales per square foot dropped 2.1%, and while overall demand showed improvement, the mix of purchases continues to shift towards smaller, essential items.
Inventory management was a key focus for Home Depot this quarter, with inventories ending Q3 at $23.90 billion, slightly above the expected $23.33 billion. The company has been managing its stock levels carefully, especially with the transition of its Atlanta warehouse to a fully automated facility. Inventory levels are now more aligned with demand, helping to prevent excess stock, though the modest increase suggests Home Depot is prepared for continued demand fluctuations in the coming quarters.
The company also observed a distinction between its do-it-yourself (DIY) and professional (Pro) customer segments. While both segments saw steady demand, Pro customers, who generally take on more complex, higher-value projects, contributed significantly to the revenue mix. The acquisition of SRS Distribution continues to strengthen HD's Pro segment by providing access to a broader range of building materials and equipment. This strategic focus on Pro customers is expected to drive sustained growth as Pro projects are generally less sensitive to short-term economic shifts compared to DIY.
Home Depot provided updated guidance for FY24, raising its expected sales growth to approximately 4% from the prior range of 2.5-3.5%, a sign of management’s confidence in demand stability. The company now anticipates a comparable sales decline of around 2.5% for the full year, an improvement from its earlier guidance of a 3-4% decline. Operating margins are expected to be around 13.5%, in line with previous estimates, and EPS is projected to decline by about 2%, at the upper end of its previous forecasted range of a 2-4% drop.
Operating performance in Q3 remained solid, with an operating margin of 13.5%, slightly lower than last year’s 14.3% due to a minor contraction in gross margin. The gross margin dipped 40 basis points to 33.4%, likely impacted by a shift in sales mix and the SRS acquisition. SG&A expenses rose by 8.5% year-over-year to $7.21 billion, above the expected $7.07 billion, partly due to increased labor costs and strategic investments in store operations.
CEO Ted Decker noted that macroeconomic uncertainty persists, but Home Depot’s Q3 performance exceeded internal expectations. He highlighted the positive impact of normalizing weather conditions, which spurred consumer engagement with outdoor and seasonal categories. Demand for hurricane-related products like generators and plywood also provided a lift to sales, particularly in regions affected by Hurricanes Helene and Milton, adding approximately 50 basis points to comp performance.
Looking ahead, management remains cautiously optimistic, with CFO Richard McPhail noting a potential recovery in housing market activity and pent-up demand for home improvement projects. As the Federal Reserve enters an easing monetary cycle, Home Depot could benefit from lower interest rates, potentially boosting consumer spending on larger renovation projects. This favorable outlook contributed to Home Depot’s raised FY24 guidance, signaling confidence in its ability to navigate economic headwinds while positioning for long-term growth.
Overall, Home Depot’s Q3 results reflect a company effectively managing short-term challenges while strategically strengthening its Pro segment and maintaining a disciplined approach to inventory and expenses. The favorable response from the market, with shares up 2.4% premarket, underscores investor confidence in Home Depot’s ability to adapt to evolving demand patterns. The $421 area looms as a key level of resistance for traders to watch. As Home Depot heads into Q4 and beyond, its mix of strategic focus and operational resilience makes it well-positioned for sustained growth amid a complex economic landscape.