What we think about Home Depot
Home Depot in Three Words: Pro, Omnichannel, DIY
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Background
The world’s largest home improvement retailer reported third quarter 2023 revenue of $37.7 billion, a 3% decrease year-over-year, while earnings per share fell 10% to $3.81. The decline was primarily due to less traffic, as total customer transactions fell (2.4%) to 400 million. Average ticket size was down (0.3%) to $89.36.
CEO and Chairman Ted Decker explained that the numbers were largely in line with expectations. “We saw continued customer engagement with smaller projects, and experienced pressure in certain big-ticket, discretionary categories.”
Total home improvement spending increased a modest 6% to $13,667 in 2023, with the average homeowner taking on eleven “honey-do” jobs per household. And while residential investment in new housing starts have declined for the previous nine straight quarters, residential permits for new single-family homes rose slightly in October and reached their highest levels in the previous 18 months.
Full year results showed weakness in the business, with comparable same-store sales declining (3.5%) during fiscal 2023 and an even worse (3.5%) in the most recent fourth quarter. The slip was due to a decline in both total transactions (down 3%) and average ticket (down 0.5%). CEO Ted Decker also issued conservative forward guidance, calling for another (1%) fall in SSS during the upcoming fiscal 2024.
Home Depot raised $2 billion of debt in 2023 and is suffering from reduced consumer spending in a shaky economy. However, the company is still the world’s largest home improvement retailer, who is generating a 14% operating margin even after increasing its investment in its digital channels.
The dip in earnings means the stock is now selling at a P/E of 24x, which is just about the most expensive multiple it’s sold at during the past five years. Home Depot is a great company and it’s built to last market cyclicality. But I don’t consider the current sales weakness and the elevated multiple to be a very attractive entry point.
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