Home Depot Quarterly Results Show Slowing Top Line and Margin Compression

Home Depot Stock at a Glance

• Current Morningstar Fair Value Estimate: $270
• Home Depot Stock Star Rating: 2 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Home Depot Earnings Update

We don’t plan any material change to our $270 per share fair value estimate for wide-moat Home Depot (HD) after considering a fourth quarter that was largely in line with our forecast and a moderating prognosis for 2023. Fourth-quarter sales of $36 billion matched our projection, and EPS of $3.30 edged our forecast by three pennies. Same-store sales contracted 30 basis points, with ticket up 5.8% and transactions down 6%, as higher prices appear to be having an impact on demand elasticity. We surmise the ticket and transaction algorithm will normalize at a low-single-digit rate over time as inflation moderates but that 2023 has some risk given the firm’s initial guidance for flat same-store sales growth—a tad below our preprint growth projection of 3.5%. In our opinion, both a slowing top line and operating margin compression (as the firm invests in the employee base) were key factors in the 5% share decline, but we still view shares as modestly overvalued, trading at a 10% premium.

We had already modeled continued investment at Home Depot to ensure its market leadership position, which drove our 14.7% operating margin target for 2023. This is just 20 basis points above Home Depot’s 14.5% goal, representing an 80-basis-point decline from fiscal 2022. Most of the decline (60 basis points) stems from the announced $1 billion in investment in compensation for front line workers, with incremental deleverage from flat sales performance partially offset by productivity initiatives. We contend such investment is imperative to elevate the customer and employee experience, in turn creating rising goodwill with both parties, which will support the brand intangible asset. With an updated store team structure, new career paths that provide pay upside could help retain employees, allowing for continuity of knowledge at the store level. Investing to perpetually improve the brand bounds our long-term operating margin outlook at 15%-16%.