Will Home Depot Stock Continue to Rally? Same-Store Sales Turn Positive, but Company Remains Cautious.

In its most recently reported quarter, Home Depot (NYSE: HD) managed to turn in positive same-store sales for the first time since the third quarter of 2022, breaking its ugly streak of declining comparable-store sales. Same-store sales are an important metric for retailers, as it shows how existing stores are performing. Costs (such as wages, utilities, and maintenance) also tend to rise over time, so if existing store sales don't increase, retailers will generally see operating deleverage, where profits start to fall faster than sales.

Let's take a closer look at Home Depot's fiscal fourth-quarter report and guidance to see if the stock can continue to rally.

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Same-store sales increase

It's been a tough environment the past couple of years for home improvement retailers. COVID lockdowns, when people were confined to their homes, led to a lot of pull forward in demand for home improvement projects, while rising interest rates led to less housing turnover and higher financing costs for projects.

However, after eight quarters of declining same-store sales, Home Depot was able to report a 0.8% increase for fiscal Q4 and a 1.3% jump in the U.S. The 0.8% increase was well above the 1.7% decline that analysts were expecting, according to StreetAccount. The number of transactions rose by 0.6%, while the average ticket size edged up 0.2%. Higher lumber and copper wire prices accounted for all of the ticket size gains. The company also acknowledged some benefit from hurricane-related sales.

Data source: Home Depot earnings reports. Home Depot's fiscal quarters end approximately one month after standard calendar quarters.

Big ticket items, which the company defines as those costing $1,000 or more, has been a continual weak spot, but comparable sales for these items rose 0.9% in the quarter. It saw strength in appliances, building materials, and lumber, although it said larger discretionary projects such as kitchen and bathroom remodels that typically need financing remained weak.

Overall, 10 of Home Depot's 16 product categories were able to post positive comp sales growth. Meanwhile, it said comparable-store sales for both pros and DIY (do it yourself) customers were up on the quarter. It also saw positive comps in 15 out of its 19 geographic regions.

Overall revenue climbed by 14% to $39.7 billion, helped by an extra week in the quarter and its recent acquisition of SRS Distribution. Adjusted earnings per share (EPS), meanwhile, jumped by 7% to $3.02. Its results were above the analyst consensus estimates for EPS of $3.01 on $39.2 billion in sales, as compiled by LSEG.

Looking ahead, Home Depot forecast revenue to grow by 2.8%, with a 1% increase in same-store sales. It expects adjusted EPS to decline by about 2%. It will look to open 13 new stores in 2025.

Image source: Getty Images.

Can the momentum continue?

Home Depot continues to expect the housing environment to remain challenged. It is not expecting a rebound in new housing starts nor a meaningful uplift in existing home turnover from 40-year lows. It's also not anticipating a big drop in mortgage rates. High interest rates, meanwhile, will continue to pressure large home remodeling projects.

Overall, it is looking for the home improvement market to remain flat to slightly up. That is below the growth the Leading Indicator of Remodeling Activity (LIRA), published by the Joint Center for Housing Studies at Harvard University, sees in 2025. As such, I think Home Depot's guidance is likely a bit conservative, as it also tends to outperform the industry. There are still clear headwinds in the industry with high interest rates and housing turnover, as many remodeling projects revolve around the buying and selling of homes, and big remodeling projects are often financed. However, the worst of the industry headwinds also appear to be over.

Looking at valuation, Home Depot's stock trades at a price-to-earnings (P/E) ratio of about 26 and a forward P/E of 25.8 based on 2025 analyst estimates. Both metrics are toward the high end of its recent historical valuations.

Data by YCharts.

Overall, I think Home Depot can outperform its guidance this year, assuming there is no economic recession. However, I also think its valuation remains a bit on the high side for a company that has been struggling to grow. I would continue to hold the stock if I owned it, but I wouldn't be adding new shares here.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.