Guggenheim: Home Depot’s Investment Plan Could Minimize Return on Shares

Will Home Depot’s massive investments limit the company going forward?

Generally, business investments are seen as a positive but not everyone is impressed by Home Depot’s massive investment plan. On Tuesday, the company was downgraded by Guggenheim out of fear that its ongoing investments could minimize the return on shares.

According to analyst Steven Forbes, Home Depot launched a large expansion plan in 2017. This $5.4 billion plan was aimed at improving the company’s stores, supply chain, and its digital presence. And while it has been mostly successful, some of this spending is being pushed into 2020 which could prevent margin expansion.

Forbes believes that these ongoing expenses will affect EBIT margins by 20 to 40 points. He lowered Home Depot’s rating from buy to neutral and removed the $230 price target. 

Things that are going well for Home Depot

2019 has been a good year for Home Depot. The company’s shares are up 33% year to date and most analysts are positive when it comes to the stock. Home Depot managed to rebound from a difficult second-quarter earnings report in August. 

And the company continues to improve its stores, digital presence, and the overall customer experience. Home Depot has done a lot to remove the friction from the buying process and its customer satisfaction increased as a result.

Home Depot followed in the footsteps of other successful retailers by making it easier for customers to order items online and pick them up at the store. The company did this by installing automated pickup lockers in 1,100 of its store locations. 

The company also made improvements on the front end of many of its stores so customers can get in and out with more ease. Home Depot also added digital price tags to many of its items. This allows customers to view product ratings before purchasing an item.

The bottom line on Home Depot

Home Depot is investing heavily in growth and this could affect its EBIT margins going forward. But clearly, Home Depot’s investments are paying off and the company’s fundamentals are strong. The company is focusing on creating an omnichannel experience, which is exactly what retail stores need to do to capture market share.

It’s impossible to predict exactly what will happen and Home Depot could be affected by many other headwinds outside of its control. But at this point, Home Depot seems to be a solid investment going forward.