Home improvement faces ‘tepid’ FY25 recovery – analyst

Ahead of Q3 results from Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW), Stifel reiterates a Hold rating on the two as the near-term outlook in the category remains favorable, but the headwinds tempering FY25 prospects are not fully appreciated in the current share price.

“We believe HD/LOW shares each are likely to trade sideways as expectations continue to digest a softer FY25 backdrop and choppy demand environment,” Stifel’s W. Andrew Carter and John Nelson said in Monday’s research report.

Although the underlying drivers remain intact, Carter and Nelson have yet to see definitive signs of an inflection and maintain their conviction for a “tepid” 2025 recovery. The shift to services continues to weigh on the category with no signs of abating as Stifel’s proprietary consumer survey suggests limited improvement in net spending “meaningfully underperforming” net spending for discretionary items.

“More importantly, we believe limited refinancing, and lethargic existing home sales will continue to constrain the recovery,” Stifel says.

Driven by an updated outlook and higher prevailing multiples, Carter and Nelson reiterate a Hold rating on Home Depot (HD) but raised the target price 6.7% to $400. While the premium valuation appropriately considers Home Depot’s (HD) unmatched position of strength in the category, expectations need to fully rightsize for a softer segment recovery in FY25 before the firm would consider taking a more constructive rating.

For FY24, Stifel expects Home Depot (HD) comp sales to be down 3% to 4%, a gross margin of 33.5%, operating margin to be between 13.5% to 13.6%, and EPS of $14.20 to $14.50 versus $14.98 estimate.

Carter and Nelson also raised their price target for Lowe’s (LOW) by 4% to $260 and reiterated a Hold rating as the company is likely to outline a cautious initial view of FY25 at the December 2024 Investor Day, and with the 14.5% operating margin target likely not achievable within the original 2025-2027 timeline. The firm now guides comparable sales to be down 3.5% to 4%, gross margin roughly flat from a year ago, and EPS between $11.70 and $11.90 versus $11.81 estimates.

Shares of Lowe’s (LOW) and Home Depot (HD) are both higher by more than 1%.