Wall Street indexes continue to grow in May, yet markets are wary that marginality of retail businesses may be affected by inflationary pressure. U.S. producer prices surprised investors on the upside this week by adding 0.5% MoM, with the so-called core components (excluding volatile energy, food and transportation costs) rising by 3.1% YoY to form the most notable jump for the last 12 months. We feel this is precisely the reason behind a rather cautious attitude to much better-than-feared Q1 numbers provided by North America's major home improvement stores owner Home Depot (HD).

Home Depot's comparable sales showed a 2.8% annual decline, and thus it was a move forward compared to a 3.5% drop as to the end of 2023. The Q1 report as a whole could be called mixed, even though EPS (equity per share) of $3.63 only slightly exceeded expert consensus of $3.60 but was as much as 28% higher than $2.82 in the Christmas quarter, while $36.42 billion of the company's revenue was nearly in line with $36.66 billion of consensus bets, 4.6% better than Q4 2023 sales but 2.4% lower than Q1 2023 sales in the same season of the previous year. Sales are also 28% up from the recent record of Q1 2020, set on peaking pandemic-driven demand, which is clearly a good sign for a bullish outlook, while Home Depot CEOs confirmed their full-year forecast. A delayed start to the spring season, an 1% decrease in transactions and a 1.3% drop in ticket size were cited, keeping intact expectations of at least a 1% surplus versus last year's sales.

Only time will show if this combination may be a catalyst for further dip-buying activity. At the first moment after the quarterly report, shares of Home Depot initially lost nearly 2.3% of its market price, but later recovered to +0.16% at the end of the trading session on May 14. Hopes for margin improvement in nearest months may lead the stock to cover the currently discounting distance from its $396.85 peak of March 21. As for now, the gains are roughly capped below $350 per share.

One very practical consequence is that the next wave of market's attraction to Home Depot may come in one of two technical cases, either on the clear breakthrough of this persisting $350 resistance area or if more attempts to drop the price may lead to testing levels which are 10% to 15% lower at first. A price range between $300 and $315 just looks suitable for extra demand ambitions of those investors who prefer to verify this ground would be more solid than the current levels around $340. Home Depot itself also repurchased $649 million worth of shares, compared to $2.9 billion bought back in the same quarter of 2023, which was probably another factor of the company's drawdown on price charts.

Most investment houses are now reiterating their Outperform ratings for HD, with many of them keeping price targets well above $400 per share. "Trends into the critical spring selling season will be a key focus. Our web traffic tracker and EPS Swoon or Pause preview report better April/May trends in consideration categories (Home, Auto) even if dollar sales remain down YoY," Evercore ISI analysts wrote.