Home Depot ( HD 0.85% ) was a beneficiary of the coronavirus pandemic. Sales boomed at the onset as millions of folks were spending more time at home and noticed a wall that needed paint, a garden that could use flowers, and a space that might become a home office.
That burst was not expected to last forever. Eventually, people would become less cautious and spend less time at home as the battle against COVID-19 beat the virus back. And, after all, there are only so many rooms you can paint and so much room in your garden. Management expects the slowdown to start in its upcoming 2022 fiscal year, for which it forecasts only slightly positive revenue growth.
Home Depot’s booming sales are slowing down
The deceleration in 2022 would mark the end of two great years of growth for Home Depot. In the fiscal year ended in January 2021, sales increased by 19.9% to reach $132 billion. And in the fiscal year ended in January 2022, it increased by 14.4% to reach $151 billion. To put those growth rates into context, it helps to look at Home Depot’s compound annual growth rate of 7.9% in the last decade. Additionally, before the outbreak, it had grown revenue double digits precisely zero times in the previous 10 years.
Beyond the simple fact that people were spending more time at home and subsequently desired to improve their living area, Home Depot was buoyed by other factors as well — not the least of which was rising home values. When folks observe the price of homes rising, they look at spending on their home as an investment rather than an expense and are encouraged to take on more projects.
Moreover, governments padded consumers’ bank accounts with several rounds of stimulus checks. Coupled with programs that paused requirements to pay student loans, enhanced unemployment benefits, and other government assistance, consumers’ financial situations weathered the pandemic reasonably well.
Finally, at the pandemic’s onset, governments forced the closures of several non-essential businesses, which allowed retailers like Home Depot to benefit from decreasing competition for consumer spending.
While some of the factors that were a tailwind for Home Depot may persist into 2022, the benefits will start fading away. Economies are reopening, and folks are getting closer to pre-pandemic shopping availability. Governments have reduced fiscal stimulus, folks are spending down bank balances, and the personal savings rate is falling. Home prices continue to surge, but it does not appear they can go much higher considering the rising affordability issues.
Perhaps a combination of the fading tailwinds had management give the following guidance for the 2022 fiscal year:
Based on this approach and assuming there are no material shifts in demand, we calculate that sales growth and comp sales growth will be slightly positive in fiscal 2022. We would expect our fiscal 2022 operating margin to be flat to 2021. And we would expect low single-digit percentage growth in diluted earnings per share compared to fiscal 2021.
What this could mean for Home Depot investors
Already, the stock has reacted to the pessimistic outlook. Home Depot stock is down roughly 24% off its high reached in January. That’s an understandable reaction. Home Depot will have to contend with rising inflation, labor shortages, supply-chain constraints, and slowing demand in the current year.
However, keep in mind that Home Depot management excelled during the pandemic and so far through economic reopening. It would be reasonable to assume it will do a solid job leading the company through the volatile times ahead.
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