Home Depot shares are up 3% after the retailer reported beats on sales, earnings, and same-store sales. While those headline numbers were down over last year, it remains our favorite way to play falling interest rates and an eventual housing rebound. Revenue for the fourth quarter ended Feb. 1 fell nearly 4% year over year to $38.2 billion, but outpaced the $38.12 billion expected by LSEG. Earnings per share (EPS) declined 13% to $2.72, but exceeded the $2.54 analyst estimate.
Bottom line: Home Depot is handling the cards it's been dealt well. The company is operating in a part of the retail sector that is under outsized pressure from stubbornly high interest rates and the affordability crisis stemming from low housing supply and turnover. It still managed to deliver its best quarter of the year. Sure, expectations have come down as the housing crisis persists, but that doesn't negate the fact that same-store sales accelerated sequentially, both domestically and overall, with both results coming in positive, despite analysts' expectations of negative growth. Even more telling is the cadence of same-store sales. On the earnings conference call with investors, management said overall comps were down 0.2% in November, improved to 0.1% in December, and accelerated to 1.3% in January. In the United States, comps were down 0.3% in November, then improved to 0.2% in December and accelerated to 1.4% in January. January sales benefited from increased storm activity. In addition, total sales topped expectations, as a 2.4% increase in the comparable average ticket price more than offset a 1.6% decline in comparable customer transactions.
One important note: While sales were down from the year-ago period's $39.7 billion, last year included a $2.5 billion benefit from an extra selling week in the quarter. After adjusting for that, sales increased over last year. This is why we put so much focus on the same-store sales metric when analyzing the retail space, as it adjusts for impacts like these and other one-time items, such as store openings and closings. Earnings would still have been down this quarter, even after accounting for the extra week, which added 30 cents per share.
Management's full-year targets are conservative relative to Wall Street expectations. But in recent years, it has been more cautious at the start of the year, which is understandable given "a frozen housing environment for three years," as CFO Richard McPhail said in an interview with CNBC. McPhail said that increased uncertainty about the job market and the ongoing affordability crisis stemming from high rates, low housing supply, and low inventory turnover are weighing on consumers. Demand for Home Depot's goods and services is closely linked to rates for home equity loans and mortgages, with the former correlated with larger home renovations and the latter, of course, to new and existing home sales.
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 hasn't been the best over the past couple of years, management has been making smart moves to strengthen the business. As a result, we think it's ready to run once interest rates start to come down and translate into lower mortgage rates. That, in turn, should increase activity in the housing market -- a dynamic we expect to materialize as we enter 2026.
Fortunately, the housing market could soon pick back up. We were early on that call, but sales should start to benefit from mortgage rates falling below 6% this week , to their lowest level since 2022. Additionally, President Donald Trump's pick for Fed Chair, Kevin Warsh, is widely expected to cut rates , which would improve consumer confidence . As a result , we are reiterating our $420 price target and maintaining our 2 rating , which means we'd wait for a pullback before buying more shares .
Guidance
Management reaffirmed its preliminary 2026 forecast from December: Sales growth of 2.5% to 4.5%, which at the 3.5% midpoint equals a target of $170.46 billion, short of the Street's $171.26 billion estimate, according to LSEG. Flat same-store sales growth to up 2%, which at the 1% midpoint is below the 1.7% estimate, according to FactSet. Gross margin of 33.1% with an adjusted operating margin of 12.8% to 13%, both in line with FactSet estimates. Flat adjusted earnings growth to up 4%, which at the 2% mark amounts to earnings of $14.98 per share, short of expectations of $15.07, according to LSEG.
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