Home Depot's (HD) Focus on Pro Business to Aid Performance

Home Depot Inc. HD has been witnessing favorable trends, with the Pro segment mainly driving sales for the past several quarters. Pro sales outpaced DIY sales in third-quarter fiscal 2023. Although lower than the year-ago quarter, the company noted that Pro backlogs continued to be healthy and elevated relative to historic trends.

Recent external data point suggests that the types of projects in these backlogs are changing from large-scale remodels to smaller projects. Pro-heavy categories like roofing, portable power and insulation continued to be strong in the fiscal third quarter. Also, the company witnessed strength in smaller projects with positive comps in categories like live goods, hardscapes and landscapes.

Plans for the Pro Segment

Home Depot remains on track with its strategic investments to build a Pro ecosystem that includes professional-grade products, exclusive brands, enhanced delivery, credit, digital capabilities, field sales support, HD rental and more. It continues to invest in Pro capabilities like enhanced fulfillment, more personalized online experience, as well as other business management tools to drive deeper engagement with Pro customers.

The company is also impressed with the momentum in its pro extra loyalty program as well as the new capabilities on its B2B website. The new interconnected capabilities remove friction for both Pros and associates, allowing them to collaborate on orders both in-store and online. The company remains on track with the building of a unique and interconnected pro ecosystem and expects this to increase its ability to expand its shares in a $450 billion addressable pro space.

Gains from the investments in the Pro business have been well-reflected in its share price. Shares of this Zacks Rank #3 (Hold) company have risen 11.3% in the past six months, outpacing the industry’s growth of 7.4%. The stock also fared better than the Retail-Wholesale sector and the S&P 500’s rise of 7.9% and 7.4%, respectively, in the same period.

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Other Factors Driving the Stock

Home Depot remains focused on expanding its business and is positioned to capture market share. Management noted that it witnessed improved customer engagement in home improvement projects, particularly for small projects, in the fiscal third quarter.

Going forward, the company remains focused on navigating the unique and uncertain environment by operating with agility amid evolving consumer trends. It also expects to drive productivity and efficiency throughout the business. As a result, it expects to deliver on its previously announced $500 million in annualized cost savings in 2024.

The company is on track with the execution of the “One Home Depot” investment plan, which focuses on expanding supply-chain facilities and technology investments and enhancing the digital experience.

HD’s interconnected retail strategy and underlying technology infrastructure have helped consistently boost web traffic for the past few quarters. Enhanced search capabilities, improved Pro site experience and robust fulfillment capabilities have been driving improved online conversions. Sales leveraging the company’s digital platforms rose 5% year over year in third-quarter fiscal 2023. The company’s strategy of providing an interconnected experience is resonating well with customers, as around 50% of online orders were fulfilled through stores in the fiscal third quarter.

Hurdles to Pullback

Home Depot has been witnessing broad-based pressure across the business, driven by softened demand. The company continued to witness softness in certain big-ticket, discretionary categories, a trend which started in fourth-quarter fiscal 2022. This led to dismal third-quarter fiscal 2023 results, with the top and bottom lines declining year over year. However, results gained from strength in categories associated with smaller projects.

Driven by the continued soft trends in big-ticket, discretionary categories, Home Depot narrowed its view for fiscal 2023. Home Depot now anticipates sales and comparable sales to decline 3-4% year over year in fiscal 2023. The operating margin rate is estimated at 14.1-14.2%. The company expects an effective tax rate of 24.5% in fiscal 2023. HD estimates earnings per share to decline 9-11% year over year in fiscal 2023.

Key Picks

Some better-ranked stocks are GMS Inc. GMS, Deckers Outdoor DECK and American Eagle Outfitters AEO.

GMS, a distributor of wallboard and suspended ceilings systems, currently carries a Zacks Rank #2 (Buy). GMS has a trailing four-quarter earnings surprise of 3.2%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for GMS’ current financial-year sales indicates growth of 2.4% from the year-ago reported number.

Deckers is a leading designer, producer and brand manager of innovative, niche footwear and accessories developed for outdoor sports and other lifestyle-related activities. It has a Zacks Rank #2 at present.

The Zacks Consensus Estimate for Deckers’ current financial-year sales and earnings indicates growth of 11.7% and 21.9%, respectively, from the year-ago reported numbers. DECK has a trailing four-quarter earnings surprise of 26.3%, on average.

American Eagle Outfitters is a specialty retailer of casual apparel, accessories and footwear. It currently carries a Zacks Rank #2. AEO has a trailing four-quarter average earnings surprise of 23%.

The Zacks Consensus Estimate for American Eagle Outfitters’ current fiscal-year sales and earnings indicates growth of 5% and 43.3%, respectively, from the previous year’s reported figures.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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