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Earnings Outlook: Home Depot earnings: Wall Street stays upbeat despite signs of weakening home-improvement demand

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Home Depot Inc. investors will soon learn the real story about what’s happening in the home-improvement sector, as some others in the business have said demand is weakening while Wall Street estimates suggest continued strength.

The retail giant is scheduled to report results for its third fiscal quarter, which runs through October, before Tuesday’s opening bell.

The FactSet consensus for earnings per share and sales have increased since the start of the quarter, and the current full-year estimates imply growth above the company’s guidance, even as the housing market slumps and consumer sentiment points to a recession.

The stock
HD,
+1.04%

has been little changed over the past three months through Friday, while the SPDR Consumer Discretionary Select Sector exchange-traded fund
XLY,
+2.40%

has shed 14.6% and the Dow Jones Industrial Average
DJIA,
+0.10%

has dipped just less than 0.1%.

Wells Fargo analyst Zachary Fadem acknowledged that the fundamental setup ahead of earnings is “tricky.” Given “toxic” housing-market sentiment, he said the stock is priced for downward estimate revisions, but he doesn’t believe those will happen.

Fadem said he believes Home Depot’s third-quarter results will show “stable business trends,” with do-it-yourself trends improving sequentially and the company’s business model more defensible in the current environment than feared.

D.A. Davidson’s Michael Baker said he believes Home Depot has one of the best chances among big-box retailers to beat same-store-sales expectations, given some indication that industry growth rates have accelerated and that benefits from Hurricane Ian are expected to continue.

And rather than full-year consensus analyst estimates being too high, Baker said Home Depot’s guidance is likely too low, and will be raised when it reports results.

In the company’s second-quarter report, which covers the three months through July, the company said it expects fiscal 2022 total sales growth of “approximately” 3.0% and EPS growth at a mid-single-digits percentage.

The current FactSet sales consensus of $156.69 billion, which has increased from $156.23 billion at the end of July, implies 3.6% growth. And the current EPS consensus of $16.60, up from $16.45 on July 29, implies a 6.8% rise.

The FactSet consensus for same-store sales to rise 3.1% is slightly above Home Depot’s guidance of approximately 3%.

This upbeat outlook comes even after Masco Corp.
MAS,
+1.83%

reported in late October a third-quarter profit that surprisingly declined and revenue that missed expectations, and cut his full-year earnings outlook. The company, which makes the Behr line of house paint that’s sold exclusively in Home Depot stores and Delta faucets, said volumes declined in most categories as “demand moderated more than expected,” amid a slowdown that was “pretty broad-based.”

Don’t miss: Here’s another sign that home-improvement demand is falling.

In addition, 3M Co.
MMM,
+2.97%
,
which makes a number of DIY home-improvement products, such as Scotch adhesives, Command hooks and Scotchgard flooring products, said last month that it saw “some softening in home improvement” during its third quarter.

At that time, Home Depot wouldn’t comment on demand trends, given the proximity to its reporting of results, but said it would “share more” when it reveals those results.

That’s when investors will know the real story.

Here’s what Wall Street is expecting from Home Depot’s third-quarter results, according to FactSet:

The EPS consensus has increased to $4.12 from $4.09 at the end of July. The company has beat EPS expectations in the past nine quarters.

The consensus for total sales has moved up to $37.95 billion from $37.85 billion on July 29. Sales have come in above expectations the past 11 quarters.

The same-store sales consensus has increased to year-over-year growth of 3.1% from 2.5% growth on July 29. The company beat expectations the past four quarters.

The stock has gained on the day earnings were reported that past two quarters, but has gained only three times after the past 12 quarterly reports. The up days saw an average gain of 3.8%, while the downs days saw an average decline of 3.4%.

Some other things to watch for, second-quarter gross margin contracted to 33.1% from 33.2% a year ago, after slipping to 33.8% from 33.9% in the first quarter.

And merchandise inventories of $26.09 billion at the end of the second quarter was up 38.0% from the year before, after showing 31.9% growth to $25.30 billion in the first quarter.

Investors should also watch for any change in management language about demand. In the second-quarter report, Chief Executive Ted Decker had said the “highest quarterly sales and earnings in our company’s history” were achieved because of “continued strength in demand for home improvement projects.”

Need to Know: Markets are getting a wake-up call in 2023, says Morgan Stanley, which offers a plan for investors to get ready.

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