Home Depot’s second-quarter earnings are likely to be more of a patch job than a full renovation, as the home improvement market continues to struggle with sluggish momentum.
The retailer’s results are due Tuesday morning. Investors are bracing for another soft print, reflecting how the home improvement market “remains frozen,” wrote Greg Melich, an analyst at Evercore ISI.
Consumers tend to start renovation projects before selling a house, or just after buying a new place. But many potential buyers are still put off by high interest rates and housing prices, resulting in fewer home improvement efforts. Higher rates also discourage homeowners from taking on larger, discretionary projects—such as renovating a kitchen, bathroom, or building a new deck—until borrowing becomes less expensive.
These macroeconomic challenges have weighed on Home Depot’s sales and share performance for the past few quarters. The company’s first-quarter sales fell 2.3% from a year prior, coming in short of analysts’ estimates.
Analysts are betting second-quarter sales will be close to 1% lower year-over-year at $42.6 billion, while same-store sales will be down by 2.2%, according to FactSet consensus estimates. Projections call for adjusted earnings of $4.53 a share, compared with $4.65 a year ago.
The Street is also growing wary that Home Depot may cut its full-year guidance—and in this case, weak demand is only part of the equation. Home Depot’s recent acquisition of SRS Distribution could weigh on earnings per share in the near term, analysts say.
The SRS acquisition is still hotly debated up and down Wall Street. Its detractors point to how the $18 billion purchase will add billions in incremental debt to Home Depot’s balance sheet, leading to a pause in share buybacks.
But bulls such as David Bellinger, an analyst at Mizuho Securities, say the acquisition was a “necessary unlock” for the company to tap into larger, complex project work that could lead to significant revenue and margin growth in the long run.
Home Depot’s management is likely to field several questions about SRS on Tuesday’s quarterly earnings call as investors try to form a better understanding of how it will affect their views about Home Depot.
In the end, however, it’s possible that neither the company’s results nor commentary on SRS will have the biggest bearing on the stock’s movement following earnings, but rather management’s thoughts about future home-improvement demand.
Steven Shemesh, an analyst at RBC Capital Markets, believes investors are willing to overlook near-term weakness in the hopes that sales will improve once interest rates are lower, leading to a sector-wide recovery.
Indeed, that hope is partially what’s bolstering Bellinger’s, the Mizuho analyst, Outperform rating on the stock.
“Our optimistic stance comes ahead of a pending inflection in transaction count growth, where we see HD well-positioned to benefit from a 2H24E sector recovery,” he wrote.
That said, it’s going to take some time for consumers to feel the impact of lower rates, which means it may still be a few months before companies such as Home Depot and competitor Lowe’s see an uptick in demand. Evercore’s Melich doesn’t believe home improvement spending will turn positive until 2025.
“Anticipation of lower rates could be deferring both housing AND remodel demand in 2024, which means that if rates start to come down, the duration of the [home improvement] downturn (13 quarters of negative traffic) and current below trend demand should lead to some growth into 2025,” Melich wrote.
Home Depot stock closed 0.8% lower at $345.81 Monday. The shares are up 0.2% this year.