Why Is Home Depot Stock Losing Steam?

Home Depot (HD) stock has declined by nearly 9% since it posted third-quarter earnings on November 19. The company’s consecutive guidance cuts on the sales front didn’t sit well with investors.

Notably, Home Depot lowered its net sales and comparable sales growth guidance twice this year. Home Depot’s management expects a delay in the realization of benefits from its “One Home Depot Strategy,” resulting in a sales guidance cut. Also, HD’s recent financial performance has failed to provide impetus to its stock.

Despite the decline, Home Depot stock is up about 27% year-to-date. However, it is lagging behind most of its peers in terms of growth. For instance, Lowe’s (LOW) stock is up 29.2% so far this year. Meanwhile, shares of Bed Bath & Beyond (BBBY) and Restoration Hardware (RH) have soared 56.5% and 84.5%, respectively.

Home Depot guidance update

During the third-quarter conference call, Home Depot said it expects net sales to rise by 1.8% in 2019. Earlier, it expected net sales to increase by 2.3%. Moreover, its comparable sales (or comps) are likely to increase by 3.5%, down from previous growth guidance of 4.0%.

Notably, this was the second guidance cut. Previously, Home Depot lowered its net sales and comparable sales outlook. The company reduced its sales growth outlook to 2.3%—down from 3.3%. Meanwhile, comps growth outlook was downward revised to 4% from 5%.

On December 11, Home Depot provided preliminary guidance for fiscal 2020 and reaffirmed fiscal 2019 outlook.

Home Depot expects total and comparable sales to increase by 3.5%–4.0% in fiscal 2020. Meanwhile, the company expects an operating margin of 14%.

Home Depot stock: analysts’ ratings and target prices

Most of the analysts lowered the price target (or PT) on HD stock, following its guidance update. However, Credit Suisse upgraded Home Depot stock to “outperform” from “neutral.” Meanwhile, Credit Suisse increased the PT to $235 from $225.

Analysts made the following downward revisions in the PT:

  • Instinet cut the PT to $224 from $237.
  • Stifel reduced the PT to $245 from $255.
  • Wedbush lowered the PT to $225 from $230.
  • J.P. Morgan cut the PT to $241 from $252.
  • Telsey Advisory reduced it to $210 from $220.
  • RBC cut the PT from $246 to $232.
  • Jefferies lowered it to $250 from $263.
  • Piper Jaffray cut the PT to $225 from $240.

Analysts maintain a consensus PT of $233.28 on Home Depot stock, implying upside potential of 7% based on its closing price of $218 on December 18.

Recent financial performance

Home Depot missed analysts’ estimates on the sales front in the last two consecutive quarters. In the previous quarter, Home Depot posted total sales of $27.2 billion, which came below analysts’ estimates of $27.5 billion. Moreover, its comps rose by 3.6%, which was also below analysts’ estimates of 4.7%.

Despite lower-than-expected sales, Home Depot continues to beat Wall Street’s estimate on the earnings front. Lower average outstanding share count drove HD’s bottom line. However, margin contraction and an increase in interest expenses remained a drag.

Headwinds to limit upside in HD stock

We believe near-term sales and margin headwinds could continue to limit the upside in Home Depot stock. Lower lumber prices and a delay in realizing benefits from its investments are likely to take a toll on the top-line growth.

Meanwhile, soft sales and adverse mix are likely to hamper Home Depot’s margins and, in turn, its bottom line.

Notably, analysts expect Home Depot’s revenues and adjusted EPS to decline in the fourth quarter of the current fiscal year. Analysts project a decline of 2.7% in its top line. Meanwhile, its bottom line is likely to decrease by 6.5%.