4 Home Depot Analysts Discuss Q3 Earnings Beat, Worrisome Housing Market Trends

Home Depot Inc. HD shares traded lower by 1.1% on Wednesday after the company reported a third-quarter earnings beat despite ongoing inflation and a U.S. housing market slowdown.

The hardware and home improvement chain reported third-quarter adjusted EPS of $4.24 on revenue of $38.87 billion. Both numbers exceeded consensus analyst estimates of $4.12 and $37.96 billion, respectively. Revenue was up 5.6% from a year ago.

Same-store sales were up 4.3% overall and 4.5% in the U.S. Home Depot said customer transactions were down more than 4% in the quarter, but sales per retail square foot were up 5%.

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Looking ahead, Home Depot reiterated its full-year guidance of EPS growth in the mid-single digits. In the company's earnings call, CEO Ted Decker said the housing market may not be as bad in 2023 as some investors are anticipating.

"Some of these crosscurrents in these next X quarters in housing, we still feel the backdrop of housing, the fundamental shortage of housing in this country and the aging of homes is incredibly strong for our space in the medium to long term," Decker said.

Solid Execution

Raymond James analyst Bobby Griffin said Home Depot's execution has been solid, but a strong bounce off of 2022 lows for the stock and housing market headwinds in 2023 make him cautious for now.

"While we are not forecasting a significant correction in earnings (base case is up ~2% y/y), we are concerned that transactions could remain negative in 2023 (slow sequentially again versus 2019 base year), leading to comparable sales pressure, especially as inflation tailwinds to comps abate some (average ticket growth has been the recent driver of comps)," Griffin wrote.

Telsey Advisory Group analyst Joseph Feldman said Home Depot's solid quarter was particularly impressive given it faced difficult comps from a year ago.

"Overall, Home Depot should remain a winner in retail, given its best-in-class execution, digital prowess, and permanent and hybrid work-from-home arrangements causing more maintenance and repair activity," Feldman wrote.

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Housing Market Headwinds

• KeyBanc analyst Bradley Thomas said Home Depot "continues to post enviable results" but housing market headwinds (i.e., slowing trends in 2023 and elevated mortgage rates) are a concern.
• Morgan Stanley analyst Simeon Gutman said even a modest deceleration in the housing market could make it difficult for Home Depot shares to gain much ground as negative home price growth "could continue into '24."

Ratings And Price Targets:

• Raymond James has a Market Perform rating.
• KeyBanc has a Sector Weight rating.
• Kelsey Advisory Group has an Outperform rating and $375 target.
• Morgan Stanley has an Overweight rating and $360 target.