Home Depot Earnings Top, Guidance Reaffirmed As Inventories Swell

Home Depot (HD) topped second-quarter earnings early Tuesday and reaffirmed guidance, even as unsold inventory stacks up.  Lowe’s (LOW) is on tap Wednesday, with the home improvement retail giants offering some insight into the weakness in the home building and remodeling markets. HD stock and LOW stock edged lower in premarket trading on Tuesday.

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The second quarter is seasonally the strongest for wholesale building retailers as home projects pick up in the summer months. Wall Street predicts moderate earnings growth for the two companies. But analysts note concerns over a weakening macro backdrop, slowing “do-it-yourself” demand and general retail weakness.

Home Depot Stock; Earnings Results

Home Depot continued its streak of beating analyst forecasts with record quarterly results for Q2. The home improvement retailer has topped quarterly earnings estimates since the first quarter of 2020, and hasn’t missed revenue predictions since Q3 2019.

Home Depot earnings rose 11.5% to $5.05 per share. Revenue grew 6.5% to $43.79 billion. Watchers expected Home Depot earnings of $4.94 per share on revenue of $43.36 billion.

Comparable sales increased 5.8% for the period, with U.S. same-store sales up 5.4%.

The company’ strategy leverages brick-and-mortar sales to help expand its e-commerce operations. In the first quarter, more than half of its online orders were fulfilled through a store. And Home Depot is diversifying its customer base. Its professional sales growth outpaced DIY or consumer sales last quarter.

One concern: Home Depot’s merchandise inventories rose to $26.09 billion, up more than 35% vs. a year earlier. That’s a sign that the Dow Jones giant loaded up on goods that are being passed over as housing starts fall and consumers back off remodeling projects.

Home Depot also reaffirmed its 2022 outlook. For the fiscal year, Home Depot still expects mid-single-digit EPS growth with total sales and comps increasing about 3%. Wall Street has forecast Home Depot earnings rising 3.6% and revenue growing 1.8%.

HD stock fell a fraction in premarket trading. Home Depot stock is down about 25% so far this year, one of the worst performers in the Dow Jones Industrial Average in 2022.

Shares have gained some ground from their 52-week low in June, but are still trading well below their December high. Home Depot stock is above its 10-day and 50-day moving averages, but faces possible resistance at its 200-day line.

Lowe’s Earnings Preview

Analysts see Mooresville, N.C.-based Lowe’s earnings climbing 7.8% year over year to $4.58 per share as sales grow 2% to $28.14 billion.

In April, Lowe’s reported its first-quarter sales fell 3% over the year from colder spring weather deterring DIY projects, which makes up 75% of its customer base. CEO Marvin Ellison said the company already started seeing an uptick in sales as temperatures became more favorable in May.

For 2022, Lowe’s anticipates EPS of $13.10-$13.60 on $97 billion-$99 billion of revenue. Analysts view EPS of $13.39 with revenue of $98.106 billion.

Shares were down slightly before Tuesday’s open.

LOW stock is down about 20% year-to-date. Like Home Depot stock, it’s regained ground from its mid-June low. Shares remain well off their 52-week high. LOW stock is currently trading above its 10-day and 50-day lines, but has yet to reclaim its 200-day moving average.

Last week, JPMorgan lowered its price target for HD stock to $311 from $355, but kept an overweight rating. Analyst Christopher Horvers noted the “earnings curve continues to deteriorate” for most of retail as consumers deal with pressures from inflation, spending normalization and slowing housing.

And Citi reduced its LOW stock target to $205 from $222 and downgraded its rating to neutral. Analyst Steven Zaccone said Lowe’s will have a tough road to expanding its margins.

You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison

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