Home Depot Earnings: Macro Factors Pinch Demand, but Long-Term Outlook Intact; Shares Rich

In recent years, a multitude of macro factors, such as low housing turnover and elevated interest rates, have weighed on Home Depot’s results, and fiscal 2024's first quarter was no exception. Comparable-store sales dropped 2.8%, near our negative 3% prerelease estimate, with comparable transactions and average tickets declining 1.5% and 1.3%, respectively. Pressures were more evident in big-ticket comp transactions (purchases over $1,000, down 6.5%), suggesting continued softness in larger discretionary projects. Nevertheless, we still believe that wide-moat Home Depot is poised to return to growth as it continues to invest prudently to enhance diverse facets of its business. We think improvements in in-stock position, return flexibility, and online shopping experience will ensure its competitive strengths remain intact. Importantly, we don’t anticipate a long wait before Home Depot enters positive comp growth territory; we expect growth to return toward the back of the year as consumer engagement normalizes in discretionary pull-forward categories (resulting in a 1% drop for the full year), which squares with the firm’s reaffirmed outlook. As we balance the first-quarter results, time value, and reiterated guidance, we don’t plan any material change to our $263 fair value estimate. The shares continue to appear highly overvalued, and we’d suggest investors remain on the sidelines.