From an operational standpoint, Home Depot (NYSE: HD) has been dealing with a difficult environment for the past few years. Same-store sales have declined consistently since the end of 2022. Despite that, the stock has held up well, and is up by around 40% over the past year as of this writing.
In its fiscal third quarter, which ended Oct. 27, same-store sales declined again. However, the decline was smaller than expected, and it looks like the company could be set to turn the corner sometime next year. So with a potential turnaround ahead for the business, is this a good time to buy the stock?
Same-store sales
Home Depot's same-store sales just fell for the eighth straight quarter. That's a streak it will look to break soon.
| Metric | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
|---|---|---|---|---|---|---|---|---|---|
| Same-store sales growth | 4.3% | (0.3%) | (4.5%) | (2%) | (3.1%) | (3.5%) | (2.8%) | (3.3%) | (1.3%) |
| U.S. same-store sales growth | 4.5% | (0.3%) | (4.6%) | (0.2%) | (3.5%) | (4%) | (3.2%) | (3.6%) | (1.2%) |
Data source: Home Depot earnings reports. Home Depot's fiscal quarters end approximately one month after standard calendar quarters.
For its fiscal 2024 third quarter, Home Depot's comparable-store sales fell by 1.3%; however, that was a much better result than the 3.3% decline that analysts had expected, according to StreetAccount. The number of transactions edged down by 0.2%, while the average ticket size shrank by 0.8%.
One area of continued weakness for the retailer has been big-ticket items, which the company defines as those costing $1,000 or more. Comparable sales on those items were 6.8% lower. Management said it continues to see softer engagement around bigger remodeling projects that may require financing.
Unlike past quarters, though, the company saw a number of categories post comp sales growth, including paint, power, outdoor garden, building materials, and indoor garden.
The home improvement retailer's overall revenue rose by 6.6% to $40.2 billion, bolstered by its recent acquisition of SRS Distribution. Adjusted earnings per share (EPS), meanwhile, dropped by 2% to $3.78. Those results were above the analysts' consensus estimates for EPS of $3.64 on $39.3 billion in sales, as compiled by LSEG.
In conjunction with the quarterly report, management adjusted its full-year same-store sales guidance. The retailer now anticipates same-store sales to decline by 2.5%, an improvement from the prior outlook for a decline of between 3% to 4%. Management said the updated guidance reflected its solid Q3 results as well as incremental hurricane-related sales.
It forecast full-year sales would rise by 4%, up from previous guidance of between 2.5% and 3.5%. This takes into account its acquisition of SRS Distribution and an extra week in fiscal 2024 compared to fiscal 2023.
Image source: Getty Images
A turnaround could be near
It's been a difficult couple of years for Home Depot in part because the pandemic pulled forward a lot of demand on home remodeling projects, and then because the combination of inflation and higher interest rates impacted financing costs and slowed housing turnover. A lot of home remodeling projects are initiated around the buying and selling of homes, but the home turnover rate hit its lowest level in at least 30 years through the first eight months of 2024, with only 2.5% of homes changing hands.
However, the Fed has begun to lower its benchmark interest rate again, and there should be pent-up demand in the home improvement space, both of which bode well for Home Depot in 2025. According to the Leading Indicator of Remodeling Activity (LIRA), published by the Joint Center for Housing Studies at Harvard University, remodeling activity is poised to return to growth in the second half of 2025. Home Depot tends to outperform the LIRA, so I think the company will see same-store sales turn positive even sooner.
Source: Joint Center for Housing Studies of Harvard University
Is Home Depot stock a buy?
Home Depot's stock has held up well despite its declining same-store sales, so shares are not in the bargain bin. It recently traded at a price-to-earnings (P/E) ratio of about 27 and a forward P/E of just under 26, based on analysts' estimates for next year. Those ratios are pretty close to the high end of its historical averages.
HD PE Ratio data by YCharts.
However, Home Depot should start to see some operating leverage once its same-store sales begin to increase, and that should lead to earnings growth. I'd consider buying Home Depot stock before that turnaround begins, as it looks like the headwinds the company has been facing should start dissipating next year.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.
