Home Depot (NYSE: HD) is America’s fourth-largest retailer and a stock market favorite.
I consider Home Depot (HD) a great measure of inflation’s effect on America’s economy and communities. To explain, Home Depot sells products most people can live without. For example, power tools, lumber, barbecues, and new appliances.
Moreover, many Home Depot customers are contractors and tradespeople who build, repair, and remodel homes. Hence, Home Depot’s financial numbers could be a great measure of inflation’s effect on economic growth.
To elaborate, an early sign of a downturn is a stoppage of construction and remodeling. People stop buying new homes or remodeling existing ones because they fear there will be no market for those structures.
Could Inflation Affect Home Depot?
However, the US Census Bureau estimates American new housing starts fell slightly from 1.695 million in May 2022 to 1.686 million in June 2022. However, new housing starts rose from 1.661 million in June 2021. Hence, housing starts are stable.
Trouble could loom for Home Depot (HD). The US inflation rate rose from 8.6% in May 2022 to 9.1% in June 2022. Inflation rose from 5.4% in July 2021.
Inflation could hurt Home Depot because rising prices could give its customers less money to spend on power tools and home improvement projects. For example, US food prices rose by 10.4% in June 2022 and US energy prices rose by 41.62% in June 2022, Trading Economic products.
Consequently, rough times could come to Home Depot. Smart investors will wonder if Home Depot could survive inflation.
Can Home Depot Survive Inflation?
I think inflation could hurt Home Depot (HD) because it has small cash reserves. For example, Home Depot had $2.844 billion in cash and short-term investments on 30 April 2022.
Moreover, Home Depot has less cash. The cash and short-term investments fell from $6.648 billion on 30 April 2021. Companies need cash to survive inflation because their expenses will rise. Thus, companies will need more cash and credit to pay bills.
Fortunately, Home Depot is making more money. Home Depot’s quarterly operating income rose from $4.825 billion on 31 January 2022 to $5.929 billion on 30 April 2022. The quarterly operating income rose from $5.791 billion on 30 April 2021.
In comparison, the quarterly gross profit grew from $12.155 billion on 30 April 2021 to $11.256 billion on 31 January 2022 to $12.539 billion on 30 April 2022.
Thus, Home Depot makes more money, but it does not save money. Hence, I think inflation could destroy Home Depot’s value because it has less cash.
Could Inflation Destroy Home Depot?
I predict inflation could damage The Home Depot (HD) because revenue growth is falling.
Stockrow estimates Home Depot’s revenues shrank by -5.37% in the quarter ending 30 April 2022. In contrast, Home Depot’s revenues grew by 32.7% in the quarter ending on 30 April 2022.
Yet Stockrow’s revenues grew from $37.50 billion on April 30 2021 to $38.908 billion on 30 April 2022. Thus, Home Depot is capable of massive revenue growth, but that growth does not translate into cash.
For example, the quarterly operating cash flow fell from $6.31 billion on 30 April 2021 to $3.789 billion on 30 April 2022. Similarly, Stockrow’s quarterly ending cash flow fell from $6.648 billion on 30 April 2021 to $2.844 billion on 30 April 2022.
Can Home Depot Pay its debts?
Thus, Home Depot (NYSE: HD) has less cash. One reason Home Depot has less cash is that it pays enormous amounts of debt.
For instance, Stockrow’s quarterly financing cash flow was -$7.07 billion on 30 April 2021, -$5.011 billion on 31 January 2022, and -$2.579 billion on 30 April 2022. A negative quarterly financing flow represents debt Home Depot is paying.
Ironically, Home Depot’s total debt has grown despite the payments. For example, the total debt grew from $41.943 billion on 30 April 2021 to $46.269 billion on 31 January 2022 to $47.815 billion on 30 April 2022.
The debt could hurt Home Depot because interest rates and borrowing costs are rising. For example, the Federal Reserve is raising interest rates in an effort to dampen inflation.
The Federal Open Market Committee raised the benchmark funds rate by 75 basis points on 27 July 2022. Investopedia estimates the Fed’s action will raise the benchmark interest rate to 2.25% to 2.5%.
Raising the benchmark funds rate can hurt Home Depot in two ways. First, it will be more expensive for Home Depot to borrow money, and as I note above, Home Depot relies heavily on borrowing.
Second, raising the benchmark fund rate makes mortgages and home loans more expensive. That makes people less likely to buy homes, embark upon remodeling projects (which home equity loans finance), and build new homes.
As I note above, the US Census Bureau estimates home starts fell in June as the interest rose. Thus, Home Depot could receive a one-two punch of falling business and rising interest rates. Home Depot could face falling revenues as its debts rise.
What Value Does Home Depot Offer?
Home Depot (HD) retains enormous value. For instance, it had $76.567 billion in Total Assets on 30 April 2022. The Total Assets grew from $72.567 billion on 30 April 2021.
Yet Home Depot has less cash, which raises doubts about the company’s ability to make money. Mr. Market shares those doubts. Home Depot’s share price fell from $327.26 on 27 July 2021 to $299.63 on 27 July 2022.
I think Home Depot is a company with a questionable business model and a falling share price. Yet, Home Depot has its attractions, such as a large dividend.
Dividend.com reports Home Depot has scheduled eight $1.90 quarterly dividends through 16 June 2024. Home Depot offered a $7.60 forward dividend and a 2.54% forward dividend yield on 28 July 2022.
I think the dividend is the only attractive aspect of Home Depot’s stock. Unfortunately, I think the HD dividend could disappear if inflation destroys Home Depot’s moneymaking capacity. I conclude that Home Depot is one of many retailers that inflation could damage or destroy.
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