Earnings Preview | Can Home Depot's Performance Continue to Stabilize Amid Ongoing Macroeconomic Headwinds?

According to Zhitong Finance, Home Depot (HD.US) will announce its fourth-quarter results before the U.S. stock market opens on Tuesday. Analysts expect sales to rise, although same-store sales are anticipated to decline for the ninth consecutive quarter. Most analysts from Visible Alpha are optimistic about the stock of this home improvement giant, giving it 8 "buy" ratings, 3 "hold" ratings, and 1 "sell" rating. The average target price for the retailer is approximately $433.

Home Depot is expected to report an adjusted earnings per share (EPS) of $3.02 for the last quarter of 2024, with sales projected to grow by 11% year-on-year to about $39 billion, up from $34.79 billion in the same period last year. Home Depot's performance last quarter exceeded expectations; however, CEO Ted Decker stated that "macroeconomic uncertainty remains."

However, analysts also predict that Home Depot's same-store sales are expected to decline again, with a year-on-year decrease of 1.66%. Competitors Walmart (WMT.US) and Lowe's (LOW.US) have indicated that sales of "big ticket" items, such as appliances, have been affected by inflation.

JP Morgan analysts stated in a recent report that they expect Home Depot's same-store sales growth in the fourth quarter to exceed expectations at 0.8%. Considering that it has been a "long three years" since Home Depot last achieved positive comparable sales in the third quarter of 2022, analysts indicated that they expect Home Depot's forecasts for 2025 to be relatively conservative.

JP Morgan analysts raised the target price for Home Depot stock from $450 to $475, stating that given Home Depot's valuation relative to its retail peers, they have included it in their "analyst's focus on growth investment list."

By 2025, elevated mortgage rates will suppress housing transaction volumes. At Lowe's December Investor Day, sentiments of stagnant demand were echoed, with the company noting that industry sales are expected to remain flat in its baseline forecast for 2025. As buyers await a reduction in mortgage rates, signs of stable demand sentiment can still be observed across various categories. Specifically, furniture and home sales grew by an average of 1%, while sales at building, garden, and supplies equipment distributors averaged a decline of 1% over the past three months. This indicates that even if large projects are not a priority, customers will remain engaged.

It is worth noting that tariffs remain an uncertain factor, with concerns surrounding categories such as raw materials and finished products. For instance, appliances from Asia may be a target, accounting for 9.1% of sales in 2023. Fortunately, due to its scale, Home Depot should be able to absorb the increased tariff costs without significantly impacting its profitability.

U.S. DIY consumers continue to feel the pressure from high interest rates and macroeconomic uncertainty, leading to a 6.8% decline in big ticket sales and a further drop in small ticket sales. Low housing transaction volumes have also weighed on DIY performance, as potential buyers are waiting for mortgage rates to decrease, although we expect the real estate market to improve in the second half of 2025, normalizing DIY spending Despite this, Home Depot has a wide economic moat. As the world's largest home improvement retailer, Home Depot has a competitive advantage due to its brand intangible assets and cost advantages. Over the past decade, Home Depot's sales growth rate has exceeded the average annual growth rate of 5.3% for the building materials and garden equipment and supplies distribution industry by 170 basis points (according to data from the U.S. Census Bureau), indicating that the brand's relevance is ongoing.

Analysts speculate that Home Depot's strong brand equity and extensive scale should continue to increase its market share in the highly fragmented $1 trillion North American home improvement market, where it has already accumulated over 15% market share (considering sales of approximately $153 billion in 2023)