By Deborah Mary Sophia
(Reuters) - Home Depot (NYSE:HD)'s annual forecast will be the prime focus for investors when the U.S. home improvement bellwether reports fourth-quarter results on Tuesday, as they scour for signs of a rebound in demand after a turbulent year.
"(2023 was) expected very much to be a transition year. All eyes are on 2024 and 2025, expecting a more normalized home improvement environment," said Sarah Henry, managing director and portfolio manager at Logan Capital Management.
"It should be mostly smooth sailing going forward," she said. Logan Capital holds shares in Home Depot.
Home Depot and smaller rival Lowe's (NYSE:LOW) are set to round out 2023 with their fifth consecutive decline in quarterly same-store sales, as tighter budgets and a shift in spending to services triggered a pause in home improvement projects.
That is expected to change as mortgage rates stabilize and the U.S. housing market shows signs of bottoming out.
Wall Street analysts have also become increasingly bullish on recovery in the home improvement space, especially in the back half of 2024, banking on factors including an expected improvement in discretionary spending and home sales.
THE CONTEXT
Promotions around holiday shopping events like Black Friday may have propped up sales in the fourth quarter, but weaker sales reports are largely expected at the end of what brokerage Truist called a "digestion" year for the industry, where companies lapped the tremendous growth seen during the pandemic.
"I don't think the investors that have stuck with (Home Depot) thus far are going to be too freaked out by slowing sales (in the quarter), which have been widely expected at this point," Logan Capital's Henry said.
For 2024, Home Depot is expected to forecast roughly flat comparable sales, improving from an estimated 3.2% decline in 2023, according to LSEG data. Lowe's is likely to forecast a 1.1% drop, compared with a projected 4.8% fall last year.
Both companies are expected to return to positive same-store sales in the second half of 2024.
"... we certainly do not see the macro climate getting worse from here, we're more confident that we'll see all those (improving macro) trends come together by (the second half)," Bernstein analysts said.
THE FUNDAMENTALS
** Home Depot is expected to report a 3.3% drop in fourth-quarter same-store sales, and a per-share profit of $2.77
** Lowe's, which reports results on Tuesday, Feb. 27, is expected to have seen same-store sales decline about 7.1%; Earnings per share are projected to be $1.68
WALL STREET SENTIMENT
** Home Depot shares have risen about 4% so far this year, while Lowe's has gained 2.6%, both underperforming a more than 5% increase in the benchmark S&P 500 index
** Lowe's stock jumped about 12% in 2023, with Home Depot adding roughly 10%
** Home Depot is rated "buy" among 36 brokerages covering the stock, LSEG data showed; At least six brokerages raised their price targets on the stock in the past month, taking median PT to $370 from $350 a month ago.
** Lowe's has an average "buy" rating with a median PT of $235