Home Depot (HD 0.95%) saw its same-store sales (or comps) fall once again, as the home improvement retailer deals with a difficult home remodeling market and a more cautious consumer. It was the sixth straight quarter in which the company saw its comparable-store sales fall.
Comps are a good indication of the strength of a retailer's business because they show how its individual stores are performing versus one year ago. Despite the recent comps fallback, the stock is still trading up more than 20% over the past year.
Let's look at Home Depot's most recent results, the state of the remodeling market, and where the stock could be headed next.
NYSE: HD
Key Data Points
Home Depot continues to see declines in comps
For the sixth time in as many quarters, Home Depot's comps sank, falling 2.8%. In the U.S. in particular, they dropped 3.2%. The company was facing relatively easy comparisons because a year ago its comps dropped 4.5% overall and 4.6% in the U.S.
The comparable numbers of transactions fell 1.5% in the quarter, while the average comparable ticket (the amount spent) slipped 1.3%. This shows that fewer customers came into its stores, and those who did spent less.
Big ticket items, which the company defines as costing $1,000 or more, were down 6.5% on a comparable-store basis. The company said it was seeing less engagement on larger projects such as kitchen and bathroom renovations. Only two of its 16 departments saw positive comps: building materials and power, with the latter including tools and outdoor power equipment.
The home improvement retailer's overall sales decreased by 2.3% to $36.4 million. Customer traffic fell 1%, while the average ticket size was down 1.3%. Online sales, however, rose 3.3%.
Management said the company's slow start to the year was caused by a delayed arrival of the spring season and continued softness in large discretionary remodeling projects. But it did say it was seeing strength in outdoor projects.
Despite the slow start to 2024, Home Depot reiterated its full-year guidance calling for a 1% increase in overall sales and a 1% decline in comps. It is looking for its gross margins to improve by 50 basis points to 33.9%. It is currently in the process of acquiring SRS Distribution (roofing supplies and building materials), which is not included in its forecast.
Image source: Getty Images.
The remodeling market outlook
Home Depot's recent struggles can largely be traced to reduced spending on remodeling and other home projects. During the pandemic, there was a lot of demand for remodeling, other home improvement projects, pools, and home furnishings. People were seemingly trapped in their homes, so that spending on home-related projects was not surprising, and it created a lot of pull-forward in demand -- when people decide to spend on projects before they would under normal conditions.
Looking at remodeling demand, spending is expected to continue to soften throughout the year, according to the Leading Indicator of Remodeling Activity (LIRA), which is published by the Joint Center for Housing Studies at Harvard University. The year-over-year declines in spending are expected to bottom out in the second half of this year, with the third quarter seeing a 7.4% drop and the fourth quarter seeing a 6.6% decrease.
LIRA was designed to forecast the annual rate of change in spending for both the current quarter and subsequent four quarters, and it sees an improvement to only a 2.6% drop in the first quarter of 2025.
Image source: Joint Center for Housing Studies, Harvard University.
Home Depot's full-year guidance for a 1% drop in comps suggests that its same-store sales will turn positive in the back half. If the LIRA projections are correct and remodeling will continue to decline in the second half of the year, the home-improvement retailer's full-year comps forecast could be difficult to hit.
Where Home Depot stock could be headed
Despite Home Depot's operational struggles over the past year and a half, its stock has performed well, up more than 20% during the past year. This has left it with a higher valuation than it had been trading at in recent years, but similar to where the stock was before the pandemic. Currently, it has a forward price-to-earnings (P/E) ratio of about 23.
HD PE ratio (forward) data by YCharts.
If the company continues to see pressure on comps the rest of the year and misses estimates, I think the stock will likely drift lower from here. But that could set it up for a nice rebound in 2025 when it will be facing easier comparisons.
At this point, lower interest rates could help as they would make financing large projects easier and perhaps spur more relocations, which tends to lead to more remodeling spending. Currently, though, the Federal Reserve seems to be taking a patient approach and will not look to rush a cut in rates.
As such, for new investors in the stock, I would probably advise waiting until later this year to start any new positions, when there likely could be a better entry point. Current investors, meanwhile, should look to ride out any near-term volatility and continue to take a long-term view.
