Home Depot’s Earnings Will Be Rough. Why Wall Street Isn’t Worried.

Home Depot reports earnings Tuesday before the market opens. (Photo by Brandon Bell/Getty Images)

A weak spring selling season for the housing market means it was likely another tough quarter for Home Depot , yet Wall Street isn’t too concerned heading into the home improvement retailer’s earnings report, due Tuesday morning.

Home improvement demand is closely related to the underlying strength of the housing market. Most people undergo renovation projects just before selling a house or after buying a new place, so the housing market’s current standstill has also been detrimental to companies such as Home Depot and Lowe’s . Sales growth for both companies has been soft for most of the past few years. The second quarter should be no different.

Visits to Home Depot stores dropped 2.2% year over year in the second quarter, according to foot-traffic data from Placer.ai. Same-store sales are expected to rise 1.3% in the quarter, according to FactSet consensus estimates, improving from the 0.3% decline in the April quarter but below the level that could mark a true resurgence in home improvement.

“We expect Home Improvement trends to remain tepid near term, with both HD and LOW missing consensus estimates in [the second quarter], as the lock-in effect continues to pressure housing turnover, although the industry has bottomed, in our view,” wrote Simeon Gutman, an analyst at Morgan Stanley.

Analysts expect Home Depot will post second-quarter adjusted earnings of $4.72 a share on $45.4 billion in sales, according to FactSet consensus estimates.

With shares up just 1.5% this year compared with the S&P 500 ’s roughly 10% gain, markets may have already priced in the weak performance, writes David Bellinger, an analyst at Mizuho Securities.

Investors are instead paying close attention to the stock’s next catalyst: the inflection of the housing market.

“Looking ahead, focus should shift toward rate cuts and any indication of a looming turn for the home improvement category,” Bellinger wrote.

Once demand picks up again, Home Depot should be well-positioned to take market share and grow at a healthy clip, analysts say.

Joseph Feldman, an analyst at Telsey Advisory Group, anticipates that consumers will gradually get used to the higher rates and stop putting off projects because of them.

Plus, he notes that home equity values have risen by more than 50% since 2019, which gives current homeowners the ability to tap into this new source of wealth for larger remodeling projects. Debt tied to home equity lines of credit has increased for 13 consecutive quarters, according to the Federal Reserve Bank of New York’s second-quarter household debt report. Heloc cash-outs were important drivers behind the “significant home center outperformance” in the 2000s, notes Michael Baker, an analyst at D.A. Davison, and the current rise in home-equity loans may also be modestly boosting sales.

Home Depot may also benefit from its improved ability to cater to “complex” professional contractors after two high-profile acquisitions of building-products companies SRS Distribution and GMS. Analysts and investors will be listening for more management commentary on how the acquired companies will contribute to Home Depot’s core and Pro businesses.

“Home Depot should remain a long-term winner in retail, given
its best-in-class execution, digital prowess, and hybrid work-from-home arrangements causing more maintenance and repair activity,” Telsey’s Feldman writes.

Write to Sabrina Escobar at sabrina.escobar@barrons.com