The Home Depot Returns To The Bargain Basement: Yay!

Key Points

• Home Depot sinks on weak results and tepid outlook, but long-term investors should be cheering. 
• The market is moving down to a critical juncture that should result in a significant trend-following signal. 
• The 2.9% dividend yield looks safe until then and the payout will likely improve before it gets worse. 

The Home Depot NYSE: HD shocked the market with weaker-than-expected earnings and poor guidance that points to the continued slowing of consumer demand. The news sent shares down about 4.0% at the low of pre-market trading, and they may go lower, but anyone with more than a year or so of time horizon should be cheering the news. The results are not great, don’t get me wrong, but that is compared to the pandemic peaks. That should be expected. The pandemic peaks were driven by trillions in Keynesian-style spending and, ultimately, the result of an inflated economy.

The takeaway for today is that business is normalizing in the wake of all the spending, the next few quarters might be rough, but Home Depot’s long-term natural trend remains bullish. There will be a good time to buy this stock, which may come by the end of the year if the chart can be used as a guide. 

"After a three-year period of unprecedented growth for our sector, during which we grew sales by over $47 billion, we expected that fiscal 2023 would be a year of moderation for the home improvement market,” says CEO Ted Decker. 

The HD market is heading for a significant turning point that could be reached by the end of the year. That point is marked by the intersection of a primary trend line that has been in play since the 2009/2011 bull market began and post-pandemic support. The pandemic was a 1-off event that juiced the entire market, which is seen clearly in the charts; now that it is over, the market should return to trend, and support is also evident. Kroger NYSE: KR is a great comparison because it is another blue chip dividend payer leading its industry. The Kroger chart is nearly identical to HD, except it’s advanced by a few more quarters. That chart shows a significant trend-following signal that could easily get the KR price action back to the pandemic highs within the next few years. 

Home Depot Had A Rough Quarter, Darker Times To Come

Home Depot had a tough quarter impacted by weather in California, lumber deflation, and, more importantly, a broad-based decline in demand. The company reported revenue of $37.3 billion which is down -4.1% compared to last year ad missed the consensus estimate by 250 basis points. The decline was driven by a 4.7% decline in sales per square foot offset by a slight 0.2% increase in ticket average. This means consumers buy a little more than last year on each trip but make fewer trips and buy less overall. 

The margins were impacted at all levels due to deleveraging and increased interest expense. The good news is that margins contracted marginally and less than expected to leave the GAAP earnings above target. The $3.82 in GAAP earnings beat by $0.03 and helped secure the dividend payments and share repurchase outlook. However, the revenue and earnings guidance came on the light side due to a reduction versus the prior guidance. The company now expects comps to fall as much as 5.0% compared to the previous 3%. EPS is expected to fall as much as 13%, which could be optimistic given the consumer outlook. 

Home Depot Pays Shareholders To Hold

Home Depot paid $2.12 billion in dividends and bought back another $2.89 billion in shares while paying $1 billion in debt and maintaining a sound balance sheet. The cash level is down from last year but offset by increased inventory, and debts are relatively flat on a YOY basis. This means the company should be able to sustain repurchases and dividend increases over this year, but the pace may slow. 

The chart does not look like a winner for 2023. The market is heading lower within a range that should find support at the low end, if not higher. The technical catalyst for a rally will be a retest of the long-term trend line, which may be reached later this year. Investors should target the low end of the range and the trend line as potential entry points.