The Home Depot (HD 179.64, +0.21, +0.12%) is down 3% despite
beating third quarter estimates and raising guidance for the year.
Comparable store sales grew 4.8%, just above estimates. Hurricanes benefited sales in August but represented a headwind in September and October.
The company raised comparable store sales guidance for the year to 5.5% from 5.3%.
On the negative side, much of the sizable EPS beat came from the tax line. While the company raised its full year outlook, the implied EPS guidance for Q4 is below estimates.
Inventories grew 10% as the company pulled forward some purchases ahead of increased tariffs that are scheduled for next year. Comparable store sales held up well given the slowdown we have seen in the housing market this fall.
On the call, Home Depot CFO Carol Tome said their forecast for sales starts with the broader economic outlook (GDP), and while housing metrics have slowed, overall fundamentals remain strong. She noted that historically, lower housing turnover hasn't had a meaningful impact on Home Depot's sales.
Home price appreciation is expected to slow again next year, but increased equity for homeowners remains a tailwind. Management noted that the housing market depends on local factors and they aren't seeing a slowdown in the hottest real estate markets where affordability has become an issue, citing Los Angeles as an example.
The Home Depot's outlook is consistent with that of the nation's largest homebuilders. While demand has slowed in recent months, favorable demographics and a lack of supply lead to expectations for this already elongated cycle to continue.
The low-quality EPS beat and soft fourth quarter EPS guidance could be enough to result in a lower share price in these unforgiving market conditions. Perhaps, the market is also skeptical of the company's upbeat outlook in the face of softer housing demand. The real estate market's true test will come in a few months when the Spring selling season should rejuvenate sales.
The Home Depot has a $198 billion market value and trades at ~18x EPS, a very narrow premium to Lowe's (LOW). Six months ago, Home Depot traded at ~20x EPS vs. Lowe’s at ~16x. Home Depot has consistently outperformed Lowe's during this cycle but the valuation premium has evaporated since former Home Depot executive Marvin Ellison become Chief Executive at Lowe's this Summer.
-- Craig Rapisarda
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