Home Depot Falls as Next Year’s Forecast Rips Off ‘Band-Aid’

(Bloomberg) -- Home Depot Inc. shares fell as much as 2.5% Wednesday as the retailer’s sales and operating margin guidance for next year disappointed Wall Street. The forecasts were provided ahead of the its 2019 Investor and Analyst Conference, which began at 9 a.m.

Analysts weren’t completely surprised by the guide down, following Home Depot’s weaker-than-expected third-quarter report Nov. 19, which included cuts to its current year comparable sales and net sales forecasts. Sentiment was low in the stock since then, with shares down 9.6% through Tuesday’s close. The slightly lower views will result in earnings-per share reductions for the year ending in January 2021, sell-side analysts said this morning.

Here’s more of what analysts had to say following the press release, but ahead of the meeting:

Evercore ISI, Greg Melich

• “HD decided to rip off the band-aid this am,” with its new forecast
• “The 3.5-4% top-line guide and 14.0% EBIT margin should soften expectations into next year,” the analyst wrote
• He predicts a bear case for EPS for the year ending January 2021 will come in around $10.50, with comparable sales growth around 3.5%, while those more bullish on the home improvement outlook can use 4.0% on the comp. line “and stay closer to $11.00”
• While next year’s outlook is a “touch lighter than we expected,” it does affirm the company’s current trends and investments in a “healthy home improvement market”
• Rates outperform

Gordon Haskett, Chuck Grom

• Next year’s forecasts were “a touch below what we think the bull camp was hoping to receive;” believes the forecasts imply EPS of around $10.20-$10.30, which compares to the current estimates of $10.87, as compiled by Bloomberg data
• “Ultimately, HD has and will continue to invest from a position of strength as it continues to fortify its leadership on the Pro front, but with the multiple not in a forgiving position and numbers coming down, the stock may retreat before moving higher”
• Rates buy, price target $260

Morgan Stanley, Simeon Gutman

• “We were wrong thinking the stock had been largely de-risked ahead of the Investor & Analyst Conference,” the analyst wrote in a note
• He and buy-side were already expecting a “below-consensus guide,” but he didn’t expect “the magnitude of the miss relative to expectations”
• The “incremental margin pressure” appears mostly to be caused by shrinkage, as well as a merchandise mix shift
• In addition, the softer-than-expected sales growth results in expense deleverage against a “peak investment year”
• Gutman cuts his EPS estimate for next year to $10.40 from $10.80
• Maintains overweight, but reduces his price target to $225 from $235

RBC, Scot Ciccarelli

• The stock is down ~10% from recent highs as investors have adjusted their growth outlooks
• The analyst believes industry trends remain “solid, albeit not as robust as they were 18+ months ago”
• HD has built up “a lot of goodwill with investors for delivering nearly a decade of strong performance,” but this year has been “a bit rockier for the company than what we had become accustomed to,” and today’s margin forecast suggests that next year’s forecasts will also have be lowered, “at least modestly”
• This could add incremental pressure on the stock in the near-term
• Ciccarelli remains a long-term bull on Home Depot and expects a “fairly upbeat message” at today’s meeting
• Rates outperform and recommends investors buy the stock on today’s pullback; price target $246

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper

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