Home Depot stock (NYSE:HD) has underperformed the broad market year-to-date, with concerns about consumer spending posing a headwind for the home improvement retail giant. Its shares have declined by 5.7% during this period. For context, the largest S&P 500 (SPX) ETF, SPDR S&P 500 ETF Trust (ETF:SPY) has risen by about 11.5% over the same time frame (see below). This trend is likely to persist, as Home Depot could still be overvalued against its own and analysts’ growth estimates. Thus, I am neutral on the stock.
Q1 Results Show Signs of Consumer Weakness
Home Depot’s Q1 results showed clear signs of consumer weakness—a trend that is likely to persist in the coming quarters. Specifically, the home improvement retailer posted total sales of $36.4 billion, a decline of 2.4% compared to last year. While new store openings contributed positively to Home Depot’s sales, this boost was not able to completely offset the 2.8% fall in comparable store sales.
The decline in same-store sales can be attributed to several factors. One such factor, for instance, was a delayed start to spring, which negatively affected sales. It particularly impacted outdoor and seasonal projects that tend to boost sales in the first quarter. The most important factor, however, appears to be consumer spending headwinds.
In the post-earnings call, management commented that there was continued softness regarding larger discretionary projects, such as kitchen and bath remodels, where customers usually use financing. This indicates customers’ weaker willingness or ability to spend on major home improvement projects.
This is further supported by the changes in the strength of transactions recorded during the quarter. To elaborate on that, there was a notable decline in sales of big-ticket items (including transactions over $1,000), which fell by 6.5% compared to the previous year. Further, the 2.8% decline in comparable sales can be broken down to comparable transaction volumes falling by 1.5% and comparable average tickets decreasing by 1.3%. In other words, there were both fewer purchases and lower spending per transaction.
Consumer Spending Headwinds Could Persist Through FY2024
Moving through the rest of FY2024, we could see consumer headwinds continuing to negatively impact Home Depot’s sales. For starters, the 2.8% decline in comparable sales can be broken down to declines of 4% in February, 0.8% in March, and 3.3% in April. Further, management’s full-year guidance forecasts that comparable sales will decline by about 1%, also supporting the notion of lasting consumer spending headwinds.
Another indicator comes from Target Corporation (NYSE:TGT), whose shares plummeted following the company’s Q1 results, as its management pointed to consumer discretionary softness. The Minneapolis-based retail behemoth posted a comparable sales decline of 3.7% for the quarter. They also forecast comparable sales of between flat and +2% in Q2, suggesting continued weakness in real terms (when including inflation).
Home Depot’s Valuation Could Suppress Upside Potential
Despite Home Depot’s share price underperformance against the overall indices, its valuation continues to appear a bit rich. This is especially the case if we assume that consumer spending headwinds are poised to last, moving forward.
Specifically, Home Depot is trading at 21.3 times this year’s expected earnings per share today. At the same time, Wall Street forecasts earnings per share growth of 1.5% and 6.2% this year and next year, respectively. The soft single-digit earnings per share growth over at least the next couple of years makes me feel that this multiple carries a significant premium. With interest rates above 5%, investors should demand either a lower multiple for this growth rate or higher growth rates to justify this valuation.
It’s also worth mentioning that Home Depot’s dividend currently hovers close to 2.8%. Additionally, its dividend growth has decelerated for two consecutive quarters, and given the ongoing headwinds, Home Depot’s next dividend hike could also be subpar. Thus, the stock’s tangible returns also appear somewhat soft for the current interest rate environment.
Is HD Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Home Depot features a Moderate Buy consensus rating based on 18 Buys, nine Holds, and two Sell recommendations assigned in the past three months. At $383.70, the average Home Depot stock price target suggests 18% upside potential.
If you’re uncertain which analyst you should trust if you want to buy and sell HD stock, the most accurate analyst covering the stock (on a one-year timeframe) is Scot Ciccarelli from Truist Financial, with an average return of 17.4% per rating and a 79% success rate.
The Takeaway
In conclusion, Home Depot stock seems to be grappling with a few headwinds, primarily due to ongoing consumer spending weakness. Its overall comparable sales decline and soft full-year outlook illustrate this argument. The stock’s underperformance could persist, moving forward. Not only are milder comparable sales likely to last a few more quarters, but even following the recent decline in share price, Home Depot’s valuation appears elevated against its near-term earnings growth potential.
