Home Depot: A Buy Despite Challenging 2023 Ahead

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Home Depot (NYSE:HD) is group to merchandise its 4Q22 net earlier nan marketplace opens connected February 21, 2023. The institution reported 4.30% comp income maturation successful Q3 2022. The 4th fourth presents a 200 ground constituent tougher comparison connected a one-year ground and a 240 ground constituent tougher comparison connected a two-year stack basis.

HD Comp income maturation (Company Data)

In summation to reliable comps, nan slowdown successful user spending sequentially from Q3 to Q4 owed to worsening macros should consequence successful an further mates of 100 bps headwinds. I americium expecting level to somewhat up comp income for Q4 arsenic a result. The mean summons is apt to beryllium up precocious azygous digits Y/Y (same arsenic Q3), offset to a bully grade by a diminution successful transactions. Management guided for affirmative comps successful Q4 and astir of nan sell-side analysts are expecting comp sales and revenues to turn successful nan 0% to 1% scope which looks reasonable.

However, much than Q4 results, investors are willing successful nan company’s FY2023 guidance and outlook commentary. If we look astatine nan commentary from its suppliers, astir person indicated a slowing extremity marketplace though nan grade is beautiful wide from a double-digit diminution according to Masco (MAS) to a overmuch much upbeat commentary from Mohawk Industries (MHK). Below are immoderate of nan applicable excerpts,

We are readying for volumes to beryllium down successful nan debased double-digit range, partially offset by debased single-digit pricing. Based connected this assumption, we expect 2023 income to diminution astir 10%”

Q4 earning telephone commentary by John G. Sznewajs - VP & CFO - Masco

…we judge markets will proceed to beryllium challenged during 2023 arsenic caller lodging starts are projected to diminution 15% to 25% and repair and remodel activity will diminution modestly year-over-year.”

Q4 earning telephone commentary by Donald Allan - President, CEO & Director - Stanley Black & Decker (SWK)

We presently spot a very challenging request situation successful 2023, and visibility beyond our first half is limited. The Fed has besides been rather clear astir its volition to slow down request successful its effort to tame inflation.”

Q4 earning telephone commentary by John G. Morikis - Chairman & CEO -The Sherwin-Williams Company (SHW)

Looking up into 2023, we do expect nan tail extremity of this antagonistic macro rhythm to beryllium felt during nan first fewer months of nan year. We foresee macro headwinds to slow move into tailwinds arsenic nan twelvemonth progresses. Needless to opportunity that it is difficult to foretell nan nonstop timing of nan displacement successful nan macro cycle, but we would expect this to hap towards precocious Q2 aliases early Q3.”

Q4 earning telephone commentary by Marc Robert Bitzer -- Chairman of The Board and CEO - Whirlpool Corporation (WHR)

..this rhythm is simply a small spot different. It's not emblematic for illustration different cycles. The employment remains beardown pinch wages increasing. Housing remains successful short proviso and debased mortgages will benignant of limit group moving arsenic much, aging homes, higher location values should support early remodeling and fortify nan rebound aliases nan pent-up demand. Commercial projects proceed to beryllium initiated, that's holding astatine this point. And ostentation is slowing and liking rates whitethorn really beryllium adjacent peak.”

Q4 earning telephone commentary by James F. Brunk - CFO - Mohawk Industries

...we expect U.S. R&R declining betwixt 4% and 6%, U.S. single-family caller building declining betwixt 18% and 22%, pinch starts down astir 25%...”

Q4 earning telephone commentary by David Barry - SVP of Finance & IR - Fortune Brands Innovation (FBIN).

I judge it is reasonable to presume a debased to mid-single-digit diminution successful nan Repair and Remodel marketplace successful 2023 pinch a speedy rebound erstwhile nan macroeconomic headwinds recede arsenic location equity levels stay healthy. The appreciation successful home prices complete nan past 5 years particularly post-Covid has resulted successful overmuch higher location equity levels for homeowners. Historically, location has been a affirmative relationship betwixt location equity levels and homeowners' willingness to walk connected remodeling. This facet is apt to partially offset immoderate of nan macro headwinds this clip and consequence successful a quicker recovery.

Home Depot should fare amended than extremity markets fixed its worth proposition which attracts customers looking to trim costs during nan slowdown. The institution is besides investing successful improving its capabilities to service ample PRO customers. Previously, while nan institution had a bully beingness among nan smaller master customers, larger professionals chiefly relied connected Home Depot arsenic a backup (not for planned purchases) owed to nan company's inefficient transportation strategy for them. In caller years, nan institution has optimized its logistics strategy and invested successful flatbed distribution centers, nonstop fulfillment centers, and marketplace transportation operations for large and bulky equipment for illustration appliances. The institution now has nan capacity to present ample quantities of materials straight to nan occupation tract which should thief it summation marketplace stock successful nan ample PRO abstraction from location independents and nationwide building worldly suppliers. In nan agelong run, nan institution plans to turn its yearly income to ~$200 bn (vs.~$151 bn successful FY21) by targeting these kinds of opportunities and gaining marketplace share.

If we deliberation astir debased to mid-single-digit extremity marketplace declines and nan company’s ample pro inaugural and different marketplace stock summation efforts offsetting it to immoderate extent, I judge level to debased single-digit income declines is simply a reasonable presumption for nan company’s comp income and wide revenues successful FY2023.

In summation to nan macroeconomic transverse currents and their effect connected nan company’s sales, investors are besides paying adjacent attraction to nan separator commentary. Before nan pandemic, nan company's gross separator was astir 34%-35%, but it dipped beneath 34% successful caller years owed to proviso concatenation issues and sourcing difficulties. However, arsenic proviso concatenation issues are starting to ease, I expect we tin spot immoderate Y/Y betterment successful gross separator successful FY2023. I americium not that optimistic astir operating separator though arsenic measurement deleveraging and management’s continuous finance successful various semipermanent initiatives to summation marketplace stock mightiness summation SG&A arsenic a percent of sales.

If we look astatine nan existent statement estimates, they are building successful a flimsy Y/Y gross maturation of ~0.63% for FY2023 (ending Jan 2024). I americium a spot much blimpish than them and judge location is simply a chance of disappointment here. If nan institution does a really bully occupation successful gaining marketplace stock and traction successful ample PRO space, nan institution whitethorn do amended than my estimates, but I judge it's prudent to beryllium blimpish fixed nan existent macros. On nan EPS front, nan sell-side statement is presently expecting ~0.77% maturation adjacent twelvemonth which I again find a spot optimistic. However, successful summation to gross and separator prospects, stock buybacks is besides a large facet successful deciding wherever nan EPS ends up successful FY2023 and it is simply a spot difficult to predict.

Given wherever nan existent statement numbers for nan adjacent twelvemonth are, I judge HD’s guidance whitethorn disappoint. However, I judge it is much a facet of nan broader macroeconomic slowdown alternatively than nan company-specific issues. The institution continues to execute good and is well-placed to summation marketplace stock successful this reliable environment.

I judge semipermanent investors should salary adjacent attraction to nan company's commentary astir Pro stock maturation and really nan institution plans to offset nan macro slowdown and thrust semipermanent growth. Usually, slowdowns for illustration nan existent one, supply a bully opportunity to bargain high-quality companies for illustration Home Depot astatine charismatic valuations. So, moreover if nan guidance outlook for 2023 misses expert expectations and nan banal sees immoderate correction, it should beryllium a buying opportunity for semipermanent investors. Hence, I person a bargain standing connected nan stock.

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