Shares of Home Depot (HD +4.30%) slid 6% on Nov. 18 after the home improvement retailer reported fiscal 2025 third-quarter results and lowered its full-year guidance.
Home Depot is now down 14% in 2025 compared to a 13% gain for the S&P 500 and an 8% bump for the Dow Jones Industrial Average. The retailer's stock makes up around 5% of the Dow at the time of this writing.
Here's how Home Depot can turn things around in 2026.
Image source: Home Depot.
From bad to worse
Home Depot's updated fiscal 2025 guidance calls for a 5% year-over-year decline in adjusted diluted earnings per share (EPS) and an adjusted operating margin of 13%. Just three months ago, management was guiding for only a 2% decline in adjusted EPS.
The guidance cut builds upon years of weak earnings growth. Home Depot's operating margin is hovering around its lowest level in a decade as the company faces declines in consumer spending and a housing market that has gone from a slowdown to a crawl.
On the Nov. 18 earnings call, management said that real estate activity is at a 40-year low as a percentage of inventory. According to CEO Ted Decker, housing turnover is at just 2.9%, meaning the percentage of existing homes being sold per year is well below typical levels.
NYSE: HD
Key Data Points
Folks are putting off buying, selling, and renovating their homes due to higher interest rates, higher costs of living, and other economic factors. The wait-and-see approach has weighed down Home Depot's results.
Decker also said the following during the earnings call:
And then when you look at the consumer; what's going to spark the consumer. We still believe we have one of the healthiest consumer segments in the whole economy. But again, the economic uncertainty continues largely now due to living costs. Affordability's a word that's being used a lot. Layoffs, increased job concerns, et cetera. So that's why we don't see an uptick in that underlying storm-adjusted demand in the business.
All told, Home Depot is about to enter its fourth year of sluggish results. The home improvement industry is no longer in a slowdown -- it's a full-fledged downturn.
Home Depot is primed for a recovery
While the industry environment may currently be bleak, there are plenty of reasons to believe the company could bounce back like a coiled spring as market conditions improve. It stands to benefit from lower interest rates, which will result in lower monthly mortgage payments and more affordable financing for a home equity line of credit -- which provides homeowners with a lump sum that can be used for home improvement projects.
Another potential catalyst for Home Depot is expanding its sales mix to include more contractors and other professionals. Despite the industrywide slowdown, the company has been making some of its largest acquisitions in its history.
In June 2024, it completed its acquisition of SRS Distribution for $18.3 billion. SRS specializes in roofing, landscaping, and pools -- especially for wholesale customers.
In September of this year, Home Depot completed its acquisition of GMS through its SRS Distribution subsidiary for an enterprise value (including net debt) of $5.5 billion. GMS distributes specialty building materials such as drywall, ceiling materials, steel framing, and other products for commercial and residential remodeling.
One of the primary reasons long-term investors should be following Home Depot stock is the fact the company has yet to fully capitalize on its integration of SRS and GMS due to the industry downturn. Decker explained Home Depot's opportunity with professional customers during the call:
We have had a number of big steps on pro [customers]. We've talked about the size of the overall home improvement [total addressable market] at $1-plus trillion, and evenly split between pro and consumer and how strong we've always been in both sectors out of our stores, the pro and the consumer, but identified real opportunity to bring increased value proposition to that pro space by building out wholesale-esque type capabilities to capture more share of wallet with that customer.
The home improvement chain's road to recovery will likely depend on an improving economy for customers through lower interest rates and better affordability, as well as realizing the potential of its investments on the pro side.
An excellent blue chip stock for long-term investors
Home Depot's results could begin to turn in the new fiscal year, which typically begins in late January or early February. But even with the stock beaten down, investors should maintain a long-term view in case the recovery takes longer than expected.
Penciling in the anticipated 5% decline in adjusted diluted EPS for fiscal 2025 -- which would imply $14.48 -- the stock has a fairly reasonable price-to-earnings ratio (P/E) of 23.2 based on its closing price on Nov. 18. The current valuation is in line with Home Depot's median 10-year P/E ratio. Considering cyclical stocks tend to fetch elevated valuations during slowdowns due to lower earnings, the retailer will be even more attractive as earnings recover.
In today's premium-priced market, Home Depot stands out as a good blue chip value play. It's also a good choice for passive-income investors as the company has raised its dividend for 16 consecutive years and yields 2.7%.
