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As we enter the later part of the September quarter earnings season, a flurry of results from the retail sector will ensue with Home Depot (HD) kicking things off this morning. The leading home improvement retailer set a positive tone by delivering a beat-and-raise Q3 earnings report that featured an upswing in comparable sales. Following a lull in demand after the pandemic, sales of seasonal and outdoor products, such as grills, experienced a strong rebound in Q3. However, persistently high interest rates and macroeconomic uncertainties are still negatively impacting parts of HD's business.

• Although comparable sales decreased for the eighth consecutive quarter, comps did improve meaningfully in Q3, coming in at (1.3)% compared to (3.3)%  in Q2. Customer transactions nearly flipped to positive territory at (0.2)%, while average ticket was (0.8)%. The better-than-expected performance enabled HD to raise its FY25 comp guidance to approximately (2.5)% from its prior forecast of (3.0)-(4.0)%.
• Along with the resurgence in grills, the Pro business continued to shine, although the scope and costs of those Pro projects have diminished under the weight of higher financing costs. Even after the Fed's interest rate cuts, mortgage rates are still above the 6% level, which is keeping a lid on the housing market. As a result, home repair projects that are typically done to prepare a house to be sold, or are done after new homeowners move in, are not as prevalent as they normally would be.
• The good news is, there is plenty of pent-up demand for larger scale projects, such as kitchen or bathroom remodels, so consumers will eventually pull the trigger on those projects. A significant drop in interest rates would accelerate that unwinding of pent-up demand.
• We believe that the stock is already mostly reflecting those expectations for stronger demand, driven by a lower interest rate environment. Despite HD's lackluster sales growth over the past several quarters, shares are up by about nearly 40% on a yr/yr basis. Likewise, HD's beat-and-raise earnings report is failing to provide a lift today because the market has already anticipated an improvement in demand.

Overall, HD turned in a solid earnings report, which bodes well for rival Lowe's (LOW) when it reports Q3 earnings one week from today. Still, HD's business isn't firing on all cylinders and Hurricane Milton and Hurricane Helene provided it with a sales bump this quarter. Unless the stubbornly higher interest rates begin to ease materially, it seems likely that HD's sales and comp growth will struggle to gain much traction.