Weak earnings on end of cycle

Home Depot reported weaker earnings – revenue fell 4.25% YoY earnings fell 8.8%. It reflects a weaker building + DIY market in the US, which is what we’re seeing across the board – specialist store Restoration Hardware (RH) reported similarly weak sales. HD fell 2.15% in response, which isn’t enough value for us yet. We initiated coverage of HD back in December where we said that HD is a best in class retailer but too expensive, citing slowdown fears. Those slowdown fears have come to pass yet now we’re anticipating more slowdown versus HD’s 3-5% projected decline in sales for the FY. We think this is too little. Home Depot’s customers tend to be “tradies” and homeowners. Typically having homeowners as a customer base is a good thing – they are cashed up and have equity. Yet we’re in an environment of rising interest rates for mortgages, which will strain that previously strong “homeowner” dollar. We still consider HD to be an exemplary business – even in a recessionary environment they still have net margins of ~20% (vs James Hardie’s 12% and Fletcher’s ~8%) and they maintain an average “ticket” price per sale of ~$92. The headline here is Pandemic spending is over and that goods spend we were seeing previously has shifted to services. See upside as $+$230 and downside as +$190. Read more at: research.blackbull.com/