Home Depot (NYSE:HD) Beats Q2 Sales Expectations, Reaffirms Full Year Outlook

Jabin Bastian /
2023/08/15 6:04 am EDT

Home improvement retail giant Home Depot (NYSE:HD) exceeded analysts' expectations in Q2 FY2023, with revenue down 2% year on year to $42.9 billion. Home Depot made a GAAP profit of $4.66 billion, down from its profit of $5.17 billion in the same quarter last year.

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Home Depot (HD) Q2 FY2023 Highlights:

  • Revenue: $42.9 billion vs analyst estimates of $42.2 billion (1.6% beat)
  • EPS: $4.65 vs analyst expectations of $4.45 (4.5% beat)
  • Free Cash Flow of $5.8 billion, up 119% from the same quarter last year
  • Gross Margin (GAAP): 33%, in line with the same quarter last year
  • Same-Store Sales were up 2% year on year (beat vs. expectations of down 4%)
  • Store Locations: 2,326 at quarter end, increasing by 10 over the last 12 months

"We were pleased with our performance in the second quarter," said Ted Decker, chair, president and CEO.

Founded and headquartered in Atlanta, Georgia, Home Depot (NYSE:HD) is a home improvement retailer that sells everything from tools to building materials to appliances.

Home improvement retailers serve the maintenance and repair needs of do-it-yourself homeowners as well as professional contractors. Home is where the heart is, so any homeowner will want to keep that home in good shape by maintaining the yard, fixing leaks, or improving lighting fixtures, for example. Home improvement stores win with depth and breadth of product, in-store consultations for customers who need help, and services that cater to professionals. It is hard for non-focused retailers and e-commerce competitors to match these. However, the research, convenience, and prices of online platforms means they can’t be fully written off, either.

Sales Growth

Home Depot is a behemoth in the consumer retail sector and benefits from economies of scale, an important advantage giving the business an edge in distribution and more negotiating power with suppliers.

As you can see below, the company's annualized revenue growth rate of 8.93% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was decent despite not opening many new stores, implying that growth was driven by higher sales at existing, established stores.

Home Depot Total Revenue

This quarter, Home Depot reported a 2% year-on-year revenue decline, beating analysts' expectations. Looking ahead, the Wall Street analysts covering the company expect revenue to remain relatively flat over the next 12 months.

While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Number of Stores

The number of stores a retailer operates is a major determinant of how much it can sell, and its growth is a critical driver of how quickly company-level sales can grow.

When a retailer like Home Depot keeps its store footprint steady, it usually means that demand is stable and it's focused on improving its operational efficiency to increase profitability. At the end of this quarter, Home Depot operated 2,326 total retail locations, in line with its store count 12 months ago.

Home Depot Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

Home Depot's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 2.7% year on year. Given its flat store count over the same period, this performance could stem from increased foot traffic at existing stores or higher e-commerce sales as the company shifts demand from in-store to online. Nevertheless, Home Depot is likely optimizing its operations for improved efficiency and profitability before expanding its physical footprint.

Home Depot Year On Year Same Store Sales Growth

In the latest quarter, Home Depot's same-store sales fell 2% year on year. This decline was a reversal from the 3% year-on-year increase it had posted 12 months ago. However, Wall Street was expecting a larger 4% decline, so this quarter's results exceeded Consensus estimates. A one quarter hiccup isn't material for the long-term prospects of a business, but we'll keep a close eye on the company.

Key Takeaways from Home Depot's Q2 Results

Sporting a market capitalization of $332 billion, more than $2.81 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Home Depot is attractively positioned to invest in growth.

This was a solid quarter, as Home Depot beat expectations across the board--same store sales, revenue, operating profit, and EPS all exceeded Wall Street Consensus estimates. The company reaffirmed its full year outlook, showing that it is staying on track. While many investors may prefer a guidance raise after a beat, other investors may cheer the prudent stance of reaffirming guidance with half the year left and some uncertainty remaining about dynamics such as interest rates and the housing market. The stock is flat after reporting and currently trades at $332.57 per share.

So should you invest in Home Depot right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.