Where Will Home Depot Stock Be in 3 Years?

Home Depot (HD 0.80%) is one of the market's most resilient retailers. It survived the retail apocalypse by selling a broad selection of home improvement products that were difficult to buy online, and its scale gave it a wide competitive moat.

But over the past three years, Home Depot's stock only rose 3% as the S&P 500 rallied 25%. It underperformed the market as inflation curbed consumer spending, labor costs rose, and higher interest rates cooled the housing market. So should patient investors still buy Home Depot as a turnaround play for the next three years?

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How bad was Home Depot's slowdown?

Home Depot experienced a major growth spurt in fiscal 2021 (which ended in January 2021) amid the post-pandemic boom in new home sales. However, its growth in total sales, comparable store sales, and earnings all decelerated in fiscal 2022 as inflation and higher rates generated headwinds for the housing market and consumer spending. All three metrics declined in fiscal 2023 as it faced more macro challenges.

Data source: Home Depot.

But even as its top-line growth cooled off, Home Depot still expanded its store count from 2,317 locations at the end of fiscal 2021 to 2,337 stores in the first quarter of fiscal 2024. That ongoing expansion indicates it's still a lot healthier than other brick-and-mortar retailers, which are shuttering their weaker stores to cut costs.

For fiscal 2024, Home Depot expects its total sales to improve 1% -- but a lot of that growth will be driven by its 12 new store openings and an extra week of sales. Excluding that extra week, it still expects its comps to decline 1% for the full year. Those estimates exclude its planned takeover of SRS Distribution, a residential specialty trade distribution company, in an $18 billion deal expected to close by the end of the fiscal year.

Home Depot is still growing faster than its top competitor

Analysts expect Home Depot's total sales to rise 3% in fiscal 2025 as the macro environment improves. By comparison, Lowe's (LOW 0.30%) sales tumbled 11% in fiscal 2023 (which ended in February 2024), and analysts anticipate another 2% decline in fiscal 2024 before it finally generates 3% growth in fiscal 2025.

For fiscal 2024, Home Depot expects its gross margin to rise 50 basis points to 33.9% as its operating margin dips 10 basis points to 14.1%. Lowe's didn't provide an outlook for its gross margin (33.4% in fiscal 2023), but it expects its operating margin to slip from 13.4% in fiscal 2023 to 12.6%-12.7% in fiscal 2024. In other words, Home Depot still has the upper hand against Lowe's, its top competitor in the U.S. market, which operated about 1,700 stores at the end of its latest quarter.

Home Depot also continues to lock in more home improvement professionals by offering exclusive discounts and perks through its free Pro rewards program. Its forthcoming acquisition of SRS should complement that expansion by reaching more customers across the fragmented roofer, pool contractor, and landscape professional markets.

Where will Home Depot's stock be in three years?

Analysts expect Home Depot's earnings to increase by 1% in fiscal 2024 and 6% in fiscal 2025 as interest rates decline and the housing market heats up again. Those growth rates are steady, but they're a bit low for a stock that still trades at 22 times forward earnings. Lowe's, which is expected to suffer a 7% earnings decline in fiscal 2024 before generating 10% growth in fiscal 2025, has a lower forward multiple of 18.

Analysts expect Home Depot's revenue and earnings to grow 4% and 8%, respectively, in fiscal 2027. If it's still trading at about 20 times earnings, its stock would only rise 6% to about $350. But if it trades at about 25 times earnings -- as it did throughout most of 2020 to 2022 -- it could rally roughly 33% to $440 over the next three years.

Home Depot's stock will likely remain out of favor unless interest rates cool and the housing market begins to accelerate. However, investors who buy the stock today can collect its reliable forward dividend yield of 2.7% until that recovery finally happens.