Source: PaxForex Premium Analytics Portal, Fundamental Insight
May is a significant month for Home Depot as it experiences a surge in customer traffic due to the rise in temperatures and energetic spending on home improvement products. This spike in demand during the springtime typically drives the chain's highest sales-volume weeks of the year. Additionally, investors receive a crucial update during this period as Home Depot's fiscal first-quarter report arrives just as the spring-demand spike begins. With the announcement set for May 16, it is worth examining the expectations around this upcoming report and where the company appears to be headed over the next few years.
Despite the recent easing of worries over a potential recession's impact on the housing market, there are still some major concerns for Home Depot shareholders ahead of its upcoming fiscal first-quarter report. The company's 2022 sales growth was impacted by a decline in customer traffic, which fell by 5% for the year. While this was better than Lowe's Companies, which saw an almost 8% drop in traffic, investors are still hoping for stabilization and improvement over the 6% decline in Q4. In late February, Home Depot executives stated that sales for this year are expected to be roughly flat compared to last year's 3% growth, making the mid-May update to that forecast crucial for the stock's short-term performance. Additionally, May tends to be a critical month for the company, with the highest sales volume weeks of the year due to a seasonal demand spike.
Home Depot has identified significant growth opportunities in the upcoming years, even though it's not expanding its store base. Its online business, which is already massive, and its increasing presence in the professional contractor niche are the primary growth drivers. As a result of these successes, Home Depot has won more market share recently and protected profitability. Maintaining its leadership position in operating profit margin, which is currently near 15% of sales compared to Lowe's 12%, will allow the chain to invest in growth initiatives and deliver more cash to shareholders through dividends and stock buybacks. Investors should look for updates on these capital return plans in the first-quarter report.
The performance of Home Depot's stock in early 2023 indicates that there is a lack of confidence among Wall Street analysts about the company's prospects for the next few quarters. If customer traffic continues to decline and sales growth remains stagnant for another year, it could lead to a decline in earnings. Additionally, there is a possibility of an economic recession in the near future.
However, it is worth noting that Home Depot has managed to navigate previous cyclical downturns in the home improvement industry successfully. These downturns are a natural occurrence in the retail industry and happen every few years on average. Unfortunately, investors cannot predict when these downturns will happen or their extent.
While external factors such as falling customer traffic and a potential recession may affect Home Depot's stock performance in the short term, the company's market share and operating profit margin will ultimately be the key drivers of its returns over the next few years. Home Depot has consistently outperformed its peers in these areas and is expected to continue doing so in the current year. Therefore, investors should keep an eye on Home Depot's stock even if the home improvement industry slows down.
As long as the price is above 277.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 281.98
- Take Profit 1: 303.00
- Take Profit 2: 313.00
Alternative scenario:
If the level of 277.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 277.00
- Take Profit 1: 268.00
- Take Profit 2: 260.00
