Why Home Depot Stock Is Rising After Earnings Missed Estimates

Home Depot stuck by its guidance for the current fiscal year, which forecasts same-store sales growth of 1%. (Photo by Brandon Bell/Getty Images)

Home Depot reported weaker-than-expected quarterly earnings and sales, signaling there still hasn’t been a full-on rebound for home improvement.

Yet the stock was moving higher on Tuesday as investors shrugged off the second quarter and looked toward the shares’ next catalyst: interest-rate cuts.

The company reported second-quarter adjusted earnings of $4.68 a share as net sales rose 4.9% from a year ago to $45.3 billion. Analysts polled by FactSet were expecting adjusted earnings of $4.72 a share on sales of $45.4 billion.

Home Depot’s same-store sales climbed 1% from a year ago, compared with the 1.2% analysts were forecasting.

Much of the sales growth appeared to come in July. Home Depot Chief Financial Officer Richard McPhail said in an interview with CNBC that comparable sales rose 3.3% that month.

“That would be the best monthly comp of the year,” wrote D.A. Davidson analyst Michael Baker in a research note.

Home Depot also stuck by its guidance for the current fiscal year, which forecasts same-store sales growth of 1% and a 2% decline in adjusted earnings per share. The company’s guidance factors in a continuation of the “consistent momentum” Home Depot has seen over the past four quarters, CEO Ted Decker said on a call with investors Tuesday, adding that he wasn’t forecasting a wider improvement in demand for larger remodeling projects or a stark turn in the housing market.

“There’s not a big uptick necessary to meet our guide,” Decker said. “The U.S. business will be more or less a similar comp rate with no meaningful lift necessary.”

The unchanged outlook, coupled with an improvement in same-store sales, was likely propping up the stock despite an initial premarket drop. Shares rose 3.9% in morning trading, to $409.98. The S&P 500 was down 0.2%.

As Bernstein analyst Zhihan Ma notes, the company’s slight earnings and revenue miss was “as expected.” The spring selling season was weak, and the housing market’s current standstill has also been detrimental to companies such as Home Depot and Lowe’s .

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. Visits to Home Depot stores dropped 2.2% year over year in the second quarter, according to foot-traffic data from Placer.ai.

But with the quarter’s weakness priced in, all eyes now turn to the “rate cut trade,” Ma wrote in a research note Tuesday, with many investors betting that lower interest rates will kick-start the housing market and subsequently spur on home improvement.

Currently, the rate environment is still giving Home Depot’s customers pause on larger remodeling projects that would typically require debt financing, McPhail said on Tuesday.

“We know that’s still an impediment in our customers’ mindset to executing projects,” McPhail said. “What I think is important to note is our Pros we survey every quarter, they say that their customers tell them they’re deferring projects, they’re not canceling projects. Home improvement demand persists and so our job is to position ourselves to be ready for that.”

Ma notes that the actual rebound may take a few months—even if the Federal Reserve cuts interest rates, mortgage rates may not immediately decrease much.

“Nonetheless, we expect the market to start pricing in a recovery way ahead of any actual improvement,” she added.

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 sector’s strength in the 2000s, D.A. Davidson’s Baker noted ahead of the report.

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.

Executives were also optimistic about the company’s ability to navigate the higher-tariff environment. Roughly half of Home Depot’s merchandise is sourced from the U.S. and won’t be subject to import costs. The other half will likely see higher levies, executives said, which could result in some “modest price movement” across select categories.

Yet as McPhail pointed out, Home Depot’s core customers—homeowners and professional contractors—are “very healthy.”

“They’re fully employed,” he said. “They’ve seen strong income gains over the past several years. They have seen home price appreciation of 50% since 2019. They’re sitting on tappable equity of over $11 trillion, which is double that they were sitting on in 2019. And so, as we predicted, we have observed continued engagement and momentum in that engagement across the core of our categories.”

Write to Sabrina Escobar at sabrina.escobar@barrons.com and George Glover at george.glover@dowjones.com