Home Depot Analyst Says Renovation Cycle May Be 'Petering Out'

Home Depot Inc HD’s near-term outlook could be dampened by spring rains, and the big box retailer could also be facing a slowing long-term renovation cycle, according to Bank of America Merrill Lynch.

The retailer's first-quarter earnings print showed lower-than-expected comps. Home Depot beat Wall Street expectations on earnings Tuesday and was essentially in line with expectations on revenue.

The closely-watched same-store sales figure, while higher year-over-year, was below expectations thanks to bad weather and deflation in lumber prices.

The Analyst

Elizabeth Suzuki maintained a Neutral rating on Home Depot with a $215 price target.

The Thesis

Home Depot may have some macro cycle issues, Suzuki said in a Tuesday note. (See her track record here.) 

“We are seeing signs that the decade-long renovation cycle may be petering out, as tailwinds such as home price appreciation and housing turnover are fading,” the analyst said.

Consumers More Cautious

BofA expects the long-running renovation cycle to continue to expand, but at a “somewhat slower pace” in 2019, with consumers getting more cautious. 

Home Depot reaffirmed guidance of 3.3-percent sales growth for the year and increased its comparable store sales guidance, though the company said the guidance doesn’t account for tariff hikes on Chinese products, Suzuki said. 

If tariffs were placed on all Chinese imports, BofA estimates about a 2.9-percent headwind to its 2020 EPS, assuming the company makes no pricing changes.

If it raises prices, it could actually help same-store sales, but bring downside risk to the gross margin, the analyst said. 

Price Action

Home Depot shares were down 0.3 percent at $190.28 at the time of publication Tuesday. 

Related Links:

Home Depot Posts Mixed Q1 Results, Reaffirms Guidance

Home Depot Prospects Hampered By Housing Market Concerns

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