Home Depot Marks Peak Sales in Q2, but Pent-Up Demand Shows Signs of Stabilization

We don’t plan any material change to our $264 fair value estimate for wide-moat Home Depot (HD) even after incorporating second-quarter results that outstripped our expectations. In the quarter, sales clocked in at $43.8 billion (up 6.5%), aided by 9.1% growth in comparable average ticket, partially offset by a 3% downdraft in transaction count. Particularly, 11.6% big ticket (higher than $1,000) growth strikes us as encouraging, as it reflects healthy pro backlogs and homeowners’ willingness to spend on large projects, in our view. Despite these optimistic results, two-year comparable growth of 10.3% was a material decline from the above-20s rates observed in the past couple of quarters, implying that pent-up demand will continue to normalize. Still, secular demand tailwinds (such as aging housing stock, home price appreciation, and elevated home equity) give us confidence in our long-term outlook for 4% average top-line growth over our 10-year explicit forecast.

Management reaffirmed its full-year guidance for 3% comp growth, 15.4% operating margin, and mid-single-digit diluted earnings per share growth, targets we deem as achievable and in line with our fiscal 2022 outlook. We believe Home Depot has appropriate tools in place to strengthen its selling apparatus through several dedicated investments underway (additional rollouts of the market delivery model, exclusive assortment expansion, and merchandising, to name a few). While these investments may limit leverage upside in the near term, we believe the efforts should propel productivity, enabling the firm to reach just shy of 16% operating margins by 2031.

We maintain our long-term thesis and continue to believe that Home Depot can seize further share gains in a highly fragmented $900 billion home improvement market. With a mid-single-digit bump after the release, the shares now trade at roughly a 25% premium to our fair value estimate. We suggest investors await a more compelling risk/reward.