We upgraded Home Depot and raised our price target. It made the best of a terrible hand
Home Depot reported a very good quarter, executing well on things it can control, despite what CFO Richard McPhail called “frozen housing conditions.” The Club stock rose modestly in Tuesday’s down market. Revenue for Home Depot’s second quarter advanced 5.7% year over year to $47.86 billion, outpacing the $47.27 billion expected by LSEG. Earnings per share (EPS) increased 5.1% to $4.92, exceeding the LSEG-compiled $4.73 estimate. The July quarter ended Aug. 2. Same-store sales , or comps, increased 1.7% versus the year-ago period, nearly double the 0.9% estimate from FactSet and almost triple first-quarter comps of 0.6%. This is a big deal because Q1 comps matched Lowe’s for the first time in nearly a year. ( Lowe’s reports its quarterly results Wednesday morning.) HD YTD mountain Home Depot YTD Shares of Home Depot are almost back to breakeven in a year marked by soaring bond yields, which have kept mortgage rates high and the housing market stalled, a tough environment for a company that makes money from supplying homebuilding and home renovation materials. While a recent surge in 30-year Treasury yields to highs not seen in nearly two decades will likely cap further near-term upside in Home Depot, the stock has gained more than 17% since hitting a 52-week low of $289 on May 19. We think that low ought to mark the bottom. Factor in a Home Depot price-to-earnings multiple toward the lower end of its three-year range and a solid dividend yield of about 2.75%, we think now is a good time to accumulate shares. We’re upgrading the stock to our buy-equivalent 1 rating and raising our price target to $370 from $360. Bottom line Management is clearly enhancing operations in a number of ways, including an increased focus on Pro customers, as well as faster delivery times for both Pro and Do-It-Yourself customers, through the nationwide rollout of Express Delivery. On the post-earnings call, merchandising boss Billy Bastek said, “Larger discretionary projects remain under pressure during the second quarter. Pro posted positive comps and outperformed DIY.” That, however, underscores the harsh reality that Home Depot’s fate is tied to the housing market. While providing everything from gardening to lighting to appliances to tools and materials needed for general home maintenance, the real drivers for Home Depot are renovations and new home construction. Both constitute large projects, which are mostly funded with loans. The cost of that debt is determined by interest rates, which move directionally with Treasury rates. Renovations tend to lean on home equity lines of credit, or HELCOs, which are tied to shorter-term bond yields, while home buying leans on mortgage rates, which are tied to long-term Treasurys. The rising bond yields reflect concerns about inflation, which is being stoked by rising oil prices due to the uncertainty around the U.S. war with Iran and subsequent bottlenecks in the Strait of Hormuz, a major global oil transport route. While problematic, the situation does give us an idea of the leading indicators that will see Home Depot’s business finally start to inflect: a sustained ceasefire that leads to a rebound in oil flowing through the strait. If that happens, and importantly, investors gain confidence that the peace and flow of oil will hold, then that should lead to lower bond yields and provide the setup needed to catalyze housing market activity. Home Depot would benefit whether the near-term benefit is an increase in renovation demand because “low-rate, lock-in” is keeping folks from moving, or because lower rates lead to increased buyer demand and, in turn, more new home starts. Both would be really great. Remember, the name of the investing game is to buy stocks at lower prices and sell them at higher prices. Generally, investors are not going to see a low entry point when everything is going great. So, the goal is to buy when the downside is limited and the upside, long-term, is attractive, which we believe is the case here. Regarding Chairman and CEO Ted Decker’s medical leave of absence, we didn’t get much of an update Tuesday, other than McPhail’s saying he expected Decker to be back “in a few months,” and that the team “will share any material developments as appropriate.” McPhail and head of U.S. stores Ann-Marie Campbell are in charge of day-to-day operations until Decker returns. Lead director Greg Brenneman, who is executive chairman of a private equity firm, will oversee the board in Decker’s absence. Commentary With the rate commentary out of the way, let’s take a closer look at what we liked and why we think Home Depot has the potential to be a coiled spring on any sign of a sustained decline in rates and resulting housing market rebound. During the quarter, a 2.8% increase in the average ticket price drove the aforementioned better-than-expected overall comps, more than offsetting a 1% decline in customer transactions. U.S. same-store sales increased 1.3%, crushing growth estimates of 0.8%. Better yet, the strong comps were the result of growing momentum throughout the quarter. Overall same-store sales increased 1.2% in May, accelerating to 1.5% in June, and accelerating again to 2.3% in July. U.S. same-store sales increased 0.5% in May, accelerating to 1.2% in June, and accelerating again to 2.2% in July. On the call, Bastek said that 13 of the company’s 16 merchandising departments posted positive comps, including storage, electrical, hardware, power, plumbing, indoor garden, kitchen, paint, bath, outdoor garden, building materials, flooring, and millwork. He also said that big-ticket comparable transactions — those with price tags over $1,000 — increased 2.4%. Management’s efforts to deliver a more interconnected experience appear to be working, with Bastek saying that “sales, leveraging our digital platforms, increased 11% compared to the second quarter of last year. This is the fifth quarter in a row with double-digit year-over-year growth driven by our ongoing investments across our interconnected platforms. “Delivering the best interconnected experience is a key component of our strategy, and our faster delivery speeds are resonating with customers and driving greater engagement,” Bastek said, adding that delivery lead times are down about 45% in the U.S. over the past 18 months, resulting in greater customer conversion. Regarding tariff refunds, Home Depot got back about $685 million, or more than 90% of what the company filed for. The refunds of the tariffs, which President Donald Trump put on using the International Emergency Economic Powers Act (IEEPA), were the result of the Supreme Court’s ruling in February that the levies were unconstitutional. McPhail said on the call that the refund benefits to Home Depot’s full-year results will be muted, as the money will be “used to offset unplanned and rising cost pressures throughout the year.” The refund in the second quarter went to reducing the company’s total cost of goods sold. That, in turn, means the gross margin increase of nearly 27 basis points to 33.7% was not as strong as reported. The company put the tariff refund benefit to margins at 85 basis points, offsetting a 60 basis point decline due to a change in the sales mix resulting from the prior acquisitions of GMS and Mingledorff. These specialty product distributors were folded into Home Depot’s SRS business, which is the backbone of the company’s push deeper into serving Pro customers. Guidance Management reaffirmed its 2026 outlook. Home Depot expects sales growth of 2.5% to 4.5%, which at the 3.5% midpoint equals a target of $170.45 billion, a bit short of the Street’s $170.96 billion estimate, according to LSEG. Same-store sales growth is seen in the range of flat to as much as 2%, which at the 1% midpoint is a tick below the 1.1% estimate, according to FactSet. The company expects a gross margin of 33.1% with an adjusted operating margin of 12.8% to 13%. That compares with FactSet consensus estimates of about 33% and 12.8%, respectively. Adjusted EPS growth of flat to as much as 4% is expected. The 2% midpoint amounts to earnings of $14.98 per share, a tad better than expectations of $14.96, according to LSEG. Why we own it Home Depot is a best-in-class operator with about 55% of sales coming from serving professionals and 45% from do-it-yourself homeowners. While the operating environment has not been the best over the past couple of years due to elevated interest rates, management has been making smart moves to beef up Pro. Competitors : Lowe’s Portfolio weighting: 2.46% Most recent buy: Nov. 18, 2025 Initiated : Sept. 9, 2024 (Jim Cramer’s Charitable Trust is long HD. 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