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Where will Home Depot’s inventory be in 1 year?
HomeDepot (NYSE:HD) investors may be pinching themselves now. Its shares followed the rise in the S&P 500 over the past 12 months, allowing the home improvement giant to stand out from many of its struggling competitors. It’s not just the wider retail sector that is under pressure. There is less demand for home improvement projects in the wake of the pandemic, and rising interest rates have also hurt home sales.
Home Depot is not immune to these challenges. In fact, the retailer recently announced another quarter of declining comparable-store sales.
However, there were some positives in the mid-May report that left investors optimistic about the recovery of positive business momentum. Let’s take a closer look.
Improving sales results
Home Depot has not been able to escape the negative operating trend that has characterized the last full year. Sales still fell in the first quarter period, which lasted until the end of March, and customer traffic was negative once again. “The quarter was impacted by a delayed spring start and continued weakness in certain larger discretionary projects,” CEO Ted Decker said in a press release.
Look closer and you will see signs of demand stabilizing. Despite the spring weather delay, sales declines improved to a 3.2% drop from 4% in the previous quarter. There was even better news about customer traffic. Home Depot’s traffic declines slowed for the second quarter in a row, dropping to 1% in the first quarter compared to 2% in the fourth quarter and 3% for all of fiscal 2023.
In other words, it’s a little early to put an end to the pandemic growth hangover, but it appears to be getting closer. Executives say Home Depot has also gained market share, which is a great sign that eventual growth recovery will occur when the industry begins to expand again.
Financial Trends
Home Depot’s earnings growth has slowed along with sales trends in recent quarters. However, its brilliant financials still reflect its premium position in the industry. The retailer’s operating profit margin remains above 14% of sales at this time, only slightly below the 14.5% rate that investors saw during the pandemic growth boom. Cash flow is healthy, allowing management to direct resources toward growth initiatives and paying down debt.
HD Free Cash Flow Chart
Home Depot is also spending money on direct shareholder returns, which is helping to boost investor returns during this slow industry period. The chain further improved its liquidity after spending in all these categories in early 2024.
The story continues
Buy now or later?
The stock is priced roughly in the middle of the valuation range that investors have seen in recent years. You can own Home Depot stock at 2.3 times sales today, below the pandemic-era high of 3 times sales but above the low of about 1.8 times sales at the time investors were most worried with a strong recession that would hit the US market.
That’s always a possibility, and Home Depot’s business will continue to be highly sensitive to any changes in economic growth rates over the next year. However, current trends point to a slight drop in sales in 2024 as the retailer takes a big step towards returning to revenue growth. These excellent profitability and cash flow trends will provide additional support to investor returns in 2024.
Therefore, while there is no guarantee that Home Depot shares will rise in the next year, there is a good chance that the stock will outperform the market if the business makes progress toward sales growth in the context of stable profit margins or in expansion.
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Demitri Kalogeropoulos holds positions at Home Depot. The Motley Fool has positions and recommends Home Depot. The Motley Fool has a disclosure policy.
Where will Home Depot’s inventory be in 1 year? was originally published by The Motley Fool