Home Depot Could Be Heading Lower Despite Solid Q2 Results

Key Points

• Home Depot had a solid quarter, but the year's strength has been seen. 
• Guidance was reiterated, but the near-term outlook is hazy because of a shift in consumer habits. 
• The analysts have been bullish; if they change their tune, HD stock will remain range bound in 2023. 

Home Depot NYSE: HD had a solid 2nd quarter posting top and bottom line strength, but it may not be enough to keep the stock moving higher. The guidance was reiterated at the previously lowered level despite robust performance suggesting the year’s strength has been seen. If so, the 2nd half of the year could be much worse than the previous forecast, so there is a new element of risk for the market.

The charts looked good for a rally ahead of the release, and analysts supported the move. If they maintain their tune, the stock could continue to rally, but wishful thinking is never a good investment thesis. 

Home Depot Has Solid Quarter; 2nd Half Outlook Is Cloudy

Home Depot had a solid quarter, with revenue and earnings above the Marketbeat.com consensus forecast. Revenue was reported at $42.92 billion, down 2.0% compared to last year but is well ahead of the consensus. The analysts expected $0.690 billion less than reported, a difference of 160 basis points.

Comp sales are down about 2.0% across the network, with US comps also down 2.0%. Transaction count fell by 1.8% and was only partially offset by a 0.1% increase in average tickets. The sales per square foot fell by 2.3%, and there was deleveraging at virtually every level. 

The earnings news is better than expected but largely due to the top-line strength. The company’s gross profit fell by 2.3%, while operating expenses grew by 4.1%. Operating income fell by 8.6% and net income by 9.9%. The earnings were better than expected, about 450 basis points, but that is due to share repurchases more than anything else.

The company’s share count is down 2.2% compared to last year, providing a tailwind to earnings and the market. Regardless, earnings are down compared to last year, and growth is not in the forecast. 

The guidance is favorable because execs reaffirmed the guidance given last quarter but unfavorable because Q2 strength is not seen in the numbers. This suggests the 2nd half of the year will be worse than previously forecast, and the CEO commentary does not give hope.

CEO Ted Decker conspicuously mentioned the medium to long-term outlook in the press release while avoiding specific comments about the near term. However, the near-term outlook is impacted by a noticeable shift away from big-ticket to small-ticket projects, which is a negative trend. 

The Analysts Are Capping Home Depot’s Upside 

The analysts are bullish on Home Depot, but their activity over the past quarter has landed Home  Depot stock on Marketbeat.com’s Most Downgraded Stock list. The stock has received a series of mixed analyses and revisions that have the stock pegged at Moderate Buy, but the sentiment is slipping, and the consensus price target is capping the upside.

The consensus target assumes the stock is fairly valued, about 1.5% below the pre-release price action, and has held steady for the last 3 months. The most recent targets are above consensus, but they came out before the release and may be too optimistic. 

The weekly chart of HD stock shows a market trending higher within a trading range. The most recent action is forming a Bullish Flag at the top of the range suggesting the trend could continue.

The caveat is that pre-market post-release action shows resistance within a critical resistance range.

Even if the market can rally from here, it faces significant resistance at $345. The trading range will persist if the market can not get above that level. If the market can’t rally now, the correction could take the market below the 150-day moving average, near $325. In that scenario, a retest of the range’s low is possible. Lowe's is also moving lower on the news.