Home Depot (HD -0.31%) shareholders are facing an unusually weak, short-term growth outlook. The home improvement giant added tens of billions of dollars to its annual sales base since 2019, but revenue is expected to stay roughly flat this year. The business is under pressure from rising interest rates and slowing consumer spending as the housing market cools.
Investors, however, achieve the best returns in periods that span several years, even if Wall Street is often focused on the next few quarters. With that bigger picture in mind, let's look at the path Home Depot's business might take into 2026 and beyond.
The 2023 year for Home Depot
The 2023 year is likely to seem disappointing to many shareholders. After comparable-store sales gains slowed to 3% last year from 11% in 2021, comps are projected to decelerate again. Home Depot's management team forecast flat comps this year.
And that growth might come entirely from rising spending. The retailer's customer traffic fell 6% in the fourth quarter that ended in late January. Home Depot offset that slump with rising average spending, and results were boosted by strength in the professional contractor niche. But the business still faces major growth pressures following several years of expanding private real estate investment.
The path on earnings
Two positive factors will likely tilt returns in shareholders' favor over the next few years. The first is earnings growth, which is likely to stay strong. Home Depot's nearly 15% profit margin puts it well ahead of peer Lowe's (LOW -0.14%) and beyond the profitability of most national retailing rivals. This rate isn't expected to fall in 2023 even though growth is slowing to near zero.
HD Operating Margin (TTM) data by YCharts.
Home Depot's management team is also skilled at capital allocation. They've used debt well over the past decade to buy back shares and boost earnings per share. Home Depot also returns about 55% of earnings to shareholders as dividends each year compared to Lowe's more cautious 35% annual goal.
Home Depot has positive factors going for it
The stock's ultimate path will depend on whether the housing market enters a modest or more severe recession and on the timing of the eventual rebound that follows. Those factors aren't knowable today, but investors do have some good reasons to expect shares to beat the market over the next several years.
These positive factors include Home Depot's industry leadership, its strong finances, and its diverse revenue base. The chain posted an impressive rebound during the intense demand pullback associated with the Great Recession just as Lowe's did.
In other words, cyclical downturns are a normal part of any retailing business, and they are no reason for an investor to avoid a high-performing business like Home Depot's.
Shareholders might see elevated volatility over the next several quarters as Wall Street becomes more or less confident about the timing or duration of any approaching recession. But Home Depot shares should still perform well through a wide range of selling conditions, just as they have over the last several decades.
