Looking for a Magnificent Growth Stock? Don’t Buy This One

It would be easy to assume Home Depot‘s (HD -0.89%) lackluster guidance for the year now underway is deliberately understated. After all, the company’s got a long history of steady revenue and earnings growth. Sales that are just even with last year’s top line and per-share profits that are lower than 2022’s earnings are well beyond the ordinary for the home improvement retailer.

Believe it though. The company’s expectations for fiscal 2023 reflect the dramatic slowdown of the home improvement industry is apt to see this year. In fact, we’re already seeing it.

A serious spending slowdown

In case you missed it, Home Depot expects fiscal 2023’s “sales growth and comparable sales growth to be approximately flat compared to fiscal 2022 (which ended Jan. 29).” It’s also looking for its “diluted earnings-per-share-percent-decline to be mid-single digits.” Such numbers would end a long, impressive growth streak.

Plenty of other outfits are seeing the same headwind for the home improvement business.

Harvard University’s Joint Center for Housing Studies is one of these outfits. Its Leading Indicator of Remodeling Activity (often just referred to as LIRA) suggests the growth rate of year-over-year spending on remodeling projects in the United States will slow to a pace of only 2.6% by the end of the year. It ended last year growing at a 16.3% growth clip, with consumers finally winding down the surge of renovations and improvements started — or at least conceived — in the midst of the COVID-19 pandemic.

And it’s not just Harvard’s LIRA pointing to a dramatic slowing of a big piece of Home Depot’s business. A poll taken by the home-improvement how-to website Today’s Homeowner suggests inflation is prompting homeowners to think twice before moving forward with a project. Namely, 28% of almost 3,700 homeowners indicate they’re going to be spending “significantly less” on home improvements than they did last year. Of these respondents, 90% of them said they’re going to combat rising prices by tackling the project themselves.

That’s easier said than done. Certainly, a number of those plans won’t be put into action, particularly if the economy continues to suffer and money remains tight.

In this same vein, the Home Improvement Research Institute forecasts that last year’s home improvement spending growth of 7.2% is likely to cool to only 1.5% this year.

And the slowdown stands to become even more real than the LIRA data or the Home Improvement Research Institute’s survey suggest. The poll from Today’s Homeowner further indicated a little more than one-third of this year’s planned home improvement projects were going to be paid for with a credit card. Personal loans and home equity loans were expected to fund another one-fourth of these improvements. That’s a major prospective roadblock for Home Depot for one simple reason: Higher interest rates are already a clear challenge, particularly for credit card holders who are now paying an average interest rate of (according to CreditCards.com) 20.3%. Another wave of interest rates increases may well push borrowing costs beyond affordability for most consumers.

To this end, know that the yields on 2-year Treasury notes just reached a multi-year high of nearly 4.7%, underscoring the soaring cost of these short-term loans.

Any other pick but Home Depot

A company-killing dynamic? No. Like always, Home Depot will push through this headwind. It’s going to be a brutal headwind, however, and could last long enough to drive the Edge results Home Depot is warning investors are in the cards.

Home Depot is already showing signs of the brewing, industry wide weakness too. While last year’s sales were up to the tune of 4.1%, last quarter’s sales only grew by 0.3%. Full-year per-share earnings grew 7.5% from 2021’s $15.53 to $16.69 for 2023, but last quarter’s bottom line of $3.30 per share is only 2.8% better than Q4 2021’s (fiscal Q4 2022’s) earnings.

Home Depot's sales and earnings are projected to stall beginning this year, through the next three years.

Data source: Thomson Reuters. Chart by author. Revenue figures are in millions.

In short, the slowdown is already very, very real.

So, take the guidance at face value. If you’re looking for a new pick for your portfolio, look elsewhere until it’s clear the home improvement retailer is on a firmer footing.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.

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