Home Depot Q3 Earnings Preview: Post-Pandemic, Sales Boom May Slow

When Home Depot (NYSE:HD) reports its latest quarterly earnings tomorrow morning, investors will be keen to know how the company is coping with current, wide-spread challenges: supply-chain disruptions, worker shortages and accelerating prices.

If the Atlanta-based home improvement giant’s shares offer any clue, Tuesday's earnings release could be somewhat rough sailing. Sales are likely to take a hit from global supply shortages, while consumers—no longer in lockdown—have started shifting their spending away from their homes, toward such things as travel and eating out.

HD stock's upward move during the first half of 2021 has slowed, after a strong rally in late summer. Shares closed on Friday at $372.63, having gained 6% during the past three months.

During the pandemic, Home Depot and its peers benefited immensely as demand increased for home furnishing and improvement products as house prices soared and interest rates fell to historical lows. But that trend is reversing as the economy opens and homeowners move their spending from do-it-yourself projects to other, non home-based avenues.

Home Depot reported same-store sales, a key metric in retail, rising 4.5% in the period ended Aug. 1, missing the 5.6% average analyst consensus estimate. Same-store sales soared more than 20% in the previous four quarters, showing a significant expansion for the Atlanta-based retailer.

Along with slowing sales, HD is also facing additional challenges. Higher shipping costs and supply disruptions are forcing many retailers to review their business plans and reduce their sales forecasts. While many competitors have released a forecast, Home Depot again declined to do so in August, citing continued uncertainty from the pandemic.

Optimisitc Forecasts/h2

Despite these challenges, some analysts have remained bullish on mega cap home improvement stocks, due to their better positioning than peers. Morgan Stanley last week reiterated its overweight call on both HD and Lowe’s (NYSE:LOW), saying it sees upside for each heading into earnings. Its note said:

“Expecting beats across retail mega caps driven by steady (and robust) top line trends with a healthy, price-taking consumer. Magnitude of beats could be lower than in past quarters given increasing margin pressures, though mega caps should manage through supply chain disruption better than peers."

Among 35 analysts polled by Investing.com , the majority of those surveyed gave HD stock an “outperform” rating.

Chart: Investing.com

However, they don’t see major price appreciation for the stock during the next 12 months.

Goldman Sachs, one of the most bullish banks on HD, said in a recent note the company will continue to generate growth, even compared with last year's strong results. The Goldman note said:

“Home Depot management believes that as home values increase, consumers become more and more likely to reinvest back into their homes, driving demand for the home improvement category.”

While spending by the DIY segment declines, business from professional contractors is picking up. The last quarter was the second quarter since the start of the pandemic where spend from pro customers outpaced that from the DIY customers.

Bottom Line

Home Depot may not have produced very strong growth in Q3, when compared with the past year, which may disappoint some investors. But the company continues to remain in an ideal position to benefit from customers’ willingness to spend on their homes.

In our view, that means slower, but nonetheless, impressive growth going forward.