Home Depot's profits are the highest, but inventories are rising

Home Depot (HD) beat second-quarter earnings early Tuesday and affirmed guidance even as unsold inventories rose. Lowe (LOW) hit the market on Wednesday, with the home improvement retail giants offering some insight into weakness in the homebuilding and remodeling markets. HD stocks and LOW stocks were lower in premarket trading on Tuesday.


The second quarter is seasonally the strongest for wholesale retailers as housing projects ramp up during the summer months. Wall Street is predicting moderate earnings growth for both companies. But analysts note concerns about weakening macro funds, slowing DIY demand and general retail weakness.

Home Depot Stock; Earnings results

Home Depot continued to beat analysts’ estimates with record Q2 quarterly results. The home improvement retailer beat Q1 2020 quarterly earnings estimates and missed Q3 2019 revenue estimates.

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

Comparable sales rose 5.8% for the period, with US same-store sales up 5.4%.

The company’s strategy is to use physical sales to help expand its e-commerce operations. In the first quarter, more than half of its online orders are 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 inventory rose to $26.09 billion, up more than 35% from a year earlier. It’s a sign that the Dow Jones giant has loaded up on commodities that are being overlooked as housing starts fall and consumers shy away from remodeling projects.

Home Depot also reaffirmed its outlook for 2022. For the fiscal year, Home Depot still expects mid-single-digit earnings per share growth with total sales and unit sales rising about 3%. Wall Street had forecast Home Depot’s profit to rise 3.6% and revenue to rise 1.8%.

Shares of HD were marginally lower in premarket trading. Shares of Home Depot are down about 25% so far this year, one of the worst performers in the Dow Jones Industrial Average in 2022.

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

Lowe’s Revenue Overview

Analysts see Mooresville, North Carolina-based Lowe earnings rose 7.8% year over year to $4.58 per share, while sales rose 2% to $28.14 billion.

In April, Lowe’s made the announcement sales for the first quarter fell 3% year-over-year due to colder spring weather deterring DIY projects, which make up 75% of the customer base. CEO Marvin Ellison said the company has already started to see an uptick in sales as temperatures turned more favorable in May.

For 2022, Lowe’s expects EPS of $13.10-$13.60 on revenue of $97-99 billion. Analysts were expecting EPS of $13.39 on revenue of $98.106 billion.

Shares fell slightly before the open on Tuesday.

LOW stocks are down about 20% year-to-date. Like Home Depot shares, they have recovered from their mid-June lows. Shares remain well above their 52-week high. LOW stocks are currently trading above their 10-day and 50-day lines, but have yet to recover 200 day moving average.

Last week, JPMorgan cut its price target on HD shares to $311 from $355, but maintained an overweight rating. Analyst Christopher Horvers noted that the “earnings curve continues to steepen” for most of retail as consumers deal with pressures from inflation, cost normalization and housing slowdowns.

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

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


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