Home Depot stock falls after earnings: Buy the dip?

Key points

• Home Depot beat second quarter earnings estimates, despite a year-over-year EPS decline.

• The company lowered its guidance for fiscal 2024 based on macroeconomic factors hurting its business.

• Is Home Depot stock a buy?

The home improvement big box store beat earnings estimates in the quarter but lowered its guidance for the rest of the year.

Home Depot (NYSE: HD) stock was down just over 1% after the opening bell Tuesday, but climbed back to even by late morning after the market had time to digest the home improvement retailer’s second quarter earnings results.

The big box store beat earnings results in the quarter, with net sales of $43.2 billion, up 0.6% year-over-year, beating the street’s estimate of $42.6 billion.

Net earnings were down 2.1% to $4.56 billion, or $4.60 per share. However, earnings beat estimates of $4.53 per share.

The earnings were solid, but by no means strong. And the outlook was even worse, as Home Depot lowered its guidance for fiscal 2024.

Comparable sales drop in quarter

While the revenue numbers were up overall, they included about $1.3 billion in sales from Home Depot’s recent acquisition of SRS Distribution, a distributor of roofing materials and building products.

Comparable sales, or same store sales, were actually down 3.3% in the quarter compared to Q2 of 2023. And in the U.S., comparable sales decreased 3.6%. 

Home Depot CEO Ted Decker said the difficult economic environment, particularly in the housing sector, has taken its toll.

“During the quarter, higher interest rates and greater macro-economic uncertainty pressured consumer demand more broadly, resulting in weaker spend across home improvement projects,” Decker said.

Worsening outlook

Home Depot leadership does not expect conditions to improve anytime soon, which is why the company lowered its outlook for fiscal 2024 for comparable store sales.

Home Depot is now expecting comparable sales to decline between 3% and 4% for the full year, which is a bigger decline than the previous guidance of a 1% comparable store decline.

A decline of 3% implies a consumer demand environment consistent with the first half of fiscal 2024, while a 4% would imply incremental pressure on consumer demand.

On the earnings call, officials did note that August comparable store sales were better than they were in July.

Also, the gross margin guidance was lowered to 33.5% for fiscal year 2024, from 33.9%.

Further, earnings per share growth is now anticipated to be 2% to 4% lower in 2024, down from the previous guidance of 1% EPS growth. That’s due in part to net interest expense that is expected to be much higher, $2.2 billion, than the previous guidance of $1.8 billion. In Q2, interest expenses rose 22%, as interest rates remained high and unchanged.

However, the company did raise its sales guidance, thanks to SRS, which is expected to bring in $6.4 billion in sales. Net sales are now anticipated to grow between 2.5% and 3.5%, up from an estimated 1% growth in the previous outlook.

Is Home Depot stock a buy?

Home Depot stock trended higher as Tuesday wore on, and was up about 1% as of midday, eastern time. The stock price is up about 1% YTD.

Given the tepid outlook for comparable sales, Home Depot stock doesn’t look like much of a buy. The stock has a median price target of $390 per share, which would be an 11% increase over the current price.

But given the sluggish outlook and a P/E ratio that has climbed to 23, I don’t see Home Depot as a good value play either.

There are certain better options in the retail space, and elsewhere.