Home Depot (HD): Will home improvement see an uptick in the coming year?

Shares of Home Depot (NYSE: HD) were up over 1% on Wednesday. The stock has gained 6% over the past one month. The company delivered better-than-expected results for the third quarter of 2023 and narrowed its guidance for the full year.

HD saw a continuation of the trends seen during the first half of the year in the third quarter and it is focused on driving productivity in the business through the remainder of the year. Although the home improvement retailer did not provide an outlook for 2024, experts’ opinions indicate that it could see moderate growth in the coming year along with a slight uptick in the overall industry.

Revenue and profits beat estimates   

Home Depot’s sales decreased 3% year-over-year to $37.7 billion in Q3 2023. Comparable sales were down 3.1%. EPS dropped 10% to $3.81 versus last year. Despite the YoY declines, both the top and bottom line numbers surpassed analysts’ projections.

Big-ticket category pressure

As stated on its quarterly conference call, in Q3, Home Depot saw customers continue to focus on smaller projects as they did last quarter as opposed to large-scale improvements. It also experienced pressure in certain big-ticket, discretionary categories like flooring, countertops and cabinets.

Comp transactions decreased 2.7% and comp average ticket was down 0.3% in Q3. Big-ticket comp transactions, or those over $1,000, were down 5.2% YoY.  

During the quarter, the Pro customer outperformed the DIY customer, and although Pro backlogs appear to be lower compared to where they were a year ago, the company said they remain healthy and elevated relative to historical norms. The retailer also saw big-ticket strength in Pro-heavy categories like roofing, insulation and portable power.

Home Depot sees huge growth opportunity in capturing a greater share of the Pro’s wallet. The company currently holds a relatively small share in the roughly $475 billion addressable market, which indicates room for expansion.

Guidance narrowed

Home Depot narrowed its guidance for the full year of 2023 and now expects sales and comparable sales to decline 3-4% versus the previous range of 2-5%. EPS is now expected to decline 9-11% versus the prior expectation of 7-13%.

Will there be an uptick in 2024?

Home Depot refrained from giving any specific guidance for 2024 on its earnings call. However, Jon Bostock, CEO of home improvement products company Leaf Home, and an industry leader, shared this view with AlphaStreet:

“I expect Home Depot to forecast moderate growth in 2024, probably 2-4%. There’s so much uncertainty with the economy and what the Fed is doing (which directly impacts both consumers and the housing market), so I think you’ll see low single-digit forecasts. One key thing of note with mortgage rates is that, at least for now, 80% of homeowners have a sub-5% mortgage rate. The uncertainty of higher rates for longer means people may invest in projects for the long-haul (i.e. a stairlift for baby boomers vs moving to a ranch).

Given these earnings beat estimates, I think it speaks to the resilience of the American consumer. We talk about economic headwinds constantly (depleted savings, credit card debt, high mortgage rate). But there are bright spots. Unemployment is historically low. Wage growth has been steady. Inflation has been falling. People tend to be drawn more to negative news, and that can undermine what looks to be a fairly strong consumer.

We knew 2023 was going to be a year of moderation in the home improvement industry. Because of the pandemic, the pendulum has swung with much greater velocity over the past several years and consumers are spending more money on travel and entertainment like Taylor Swift concerts or the Barbie movie. In 2024, I expect to see more disposable income being spent on discretionary home projects, but still at a slower rate.”