Home Depot HD released its second-quarter earnings report and presented a mixed picture to investors. While the company beat Home Depot analysts’ earnings estimates, its lowered comparable sales forecast for fiscal 2024 caused Home Depot’s share price to decline. Following the announcement, Home Depot shares fell about 5% in premarket trading but recovered some losses in early morning trading.

Home Depot’s second quarter results at a glance

Home Depot’s fiscal second quarter 2024 financial report showed total revenue of $43.17 billion, beating analysts’ expectations. The company also reported net income of $4.56 billion, a figure that also beat analysts’ forecasts. However, these numbers were impacted by the acquisition of SRS Distribution, which was completed during the quarter. The acquisition, which cost $18.25 billion, added $1.3 billion to revenue from six weeks of SRS sales, boosting the company’s top line. This underscores the importance of analyzing a company’s earnings report with a focus on underlying business performance, which is often measured using comparable sales.

Comparable sales, which track sales in stores for at least a year, provide a more accurate indication of a company’s organic growth. Home Depot’s comparable sales declined 3.3% worldwide in the second quarter, indicating a slowdown in customer demand for home improvement and construction projects. This decline shows the impact of macroeconomic factors on the company’s performance.

Home Depot shares plunge after earnings announcement

The market reacted negatively to Home Depot’s lowered sales forecast. Following the announcement, the company’s share price fell about 5% in premarket trading. However, analysts advised buying on the dip, which likely helped the stock quickly recover from some losses. This suggests that some investors may see value in the company despite the near-term headwinds.

Industry analysts are closely monitoring the situation. For example, JPMorgan Analysts have stated that they would “buy on any weakness in the stock.” This also seems to indicate that some analysts believe Home Depot’s stock is undervalued and offers a buying opportunity, even with the lowered forecast.

Home Depot growth curve

Home Depot’s 53-week fiscal 2024 forecast revealed a significant change in the company’s outlook. While the company expects total sales to increase 2.5% to 3.5% from fiscal 2023, with SRS contributing about $6.4 billion to the top-line increase, it also lowered its comparable sales forecast for the year.

The company now expects comparable sales to decline 3 to 4 percent, a downward revision from its previous forecast of 1 percent. This revision signals increased caution about consumer demand for home improvement projects, especially given the current macroeconomic environment. Home Depot CEO Ted Decker attributed the lowered forecast to “higher interest rates and greater macroeconomic uncertainty,” suggesting consumers are increasingly hesitant to undertake major home improvement projects.

This trend reflects a broader pattern within the home improvement industry. Home Depot’s competitor, Lowe’s LOWhas cited inflation and rising interest rates as factors that have put pressure on sales in recent quarters. Consumers are focusing their spending on essentials and postponing major purchases that require significant upfront costs. This trend could continue to impact the home improvement sector in the coming months, potentially putting pressure on the future performance of both companies.

Beyond GAAP: Understanding Home Depot’s Financial Reporting

Non-GAAP financial measures are measures that are not required by generally accepted accounting principles (GAAP). Companies often use these measures to present a more focused view of their core performance while excluding certain one-time items that could distort the picture. However, it is important for investors to use non-GAAP numbers in conjunction with GAAP numbers to gain a more comprehensive understanding of a company’s performance.

In Home Depot’s earnings report, the company reported adjusted operating income, adjusted operating margin and adjusted diluted earnings per share (EPS) as non-GAAP measures. These measures exclude the impact of amortization expense from acquired intangible assets, providing a clearer view of the company’s core operating performance.

Although non-GAAP numbers can provide valuable insight, investors should always compare them to GAAP numbers to get the complete picture. By reconciling non-GAAP measures with their GAAP counterparts, investors can understand the differences and make more informed comparisons. This practice is critical to making investment decisions based on a comprehensive understanding of a company’s financial performance.

Home Depot’s future path

Home Depot’s second-quarter earnings report presented a mixed bag to investors. While the company beat earnings estimates, its lowered 2024 comparable sales guidance raised concerns about the company’s future performance. The company’s CEO attributed the downward revision to macroeconomic uncertainty and higher interest rates, suggesting continued pressure on consumer spending.

The home improvement industry is facing headwinds from inflation and rising interest rates, which could continue to impact the sector in the coming months. However, it is important to remember that Home Depot remains a strong company with a solid track record. While the stock may experience short-term volatility due to the economic climate, investors should continue to monitor the company’s performance and future guidance to make informed investment decisions.

The article “Home Depot shares slide on forecasts despite beating earnings” first appeared on MarketBeat.