Home Depot beat quarterly expectations on Tuesday but warned that sales in the second half of the year will be weaker than expected as high interest rates and consumer uncertainty dampen demand.
The DIY retailer said it now expects full-year comparable sales to fall 3% to 4% compared with the previous fiscal year. It had previously expected comparable sales, a measure that strips out the impact of store openings and closures and other one-time factors, to fall about 1%.
Home Depot's total annual sales will get a boost from the recently completed acquisition of SRS Distribution, a company that sells supplies to professionals in the landscaping, roofing and pool industries. Total sales are expected to rise 2.5% to 3.5%, including a 53rd week in the fiscal year and about $6.4 billion in sales from SRS. But excluding SRS sales, the new full-year forecast would imply a decline in sales.
In an interview with CNBC, Chief Financial Officer Richard McPhail said that Home Depot has been dealing with consumers who have a “procrastination mentality” since mid-2023, putting off buying and selling homes and borrowing money for larger projects like kitchen renovations because of interest rates.
Still, he said surveys of customers and residential construction professionals, such as contractors, over the past quarter showed that have tackled another challenge: a more cautious consumer.
“Professionals are telling us that for the first time, their clients are not just deferring because of higher borrowing costs,” he said. “They are deferring because of a sense of greater uncertainty in the economy.”
Here's what the company reported compared with what Wall Street expected for the three-month period ended July 28, based on a survey of analysts by LSEG:
- Earnings per share: $4.60 vs. $4.49 per share expected
- Gain: $43.18 billion vs. $43.06 billion expected
The company's shares fell slightly in pre-market trading.
Home Depot is riding a wave of retail gains as economists, investors and politicians closely watch the health of the American consumer and try to predict the economic outlook, including the likelihood of a recession. While inflation has cooled, higher prices — particularly for staples like groceries, energy and housing — continue to frustrate customers. They’ve also become a major talking point on the 2024 campaign trail.
This week and next, more consumer signals will come in as Walmart reports earnings and government shares retail sales figures Thursday. Other retailers, including Goal, Macy's And Best buywill also publish the results in the coming weeks.
Compared to many other retailers, Home Depot has a more financially stable customer base. About half of its sales come from home professionals and about half from DIY customers. About 90% of those DIY customers are homeowners.
Still, Home Depot was still feeling the impact of consumer uncertainty, McPhail said. He said the company saw slower demand for a wide range of project-driven items, including lighting and flooring.
Home Depot's Net Income for Fiscal Second Quarter dropped to $4.56 billion, or $4.60 per share, compared to $4.66 billion, or $4.65 per share, in the same period a year earlier.
Revenue rose slightly from $42.92 billion in the same period last year.
Comparable sales fell 3.3% across all industries in the quarter, including 3.6% in the U.S., worse than the 2.1% decline analysts had expected, StreetAccount said.
It was the seventh consecutive quarter of negative comparable sales at Home Depot.
Shoppers visited Home Depot's stores and website less often, and spent less when they did, during the quarter compared to the same period last year. Customer transactions fell nearly 2% and the average ticket price fell slightly to $88.90 from $90.07 in the year-ago quarter
Consumers have put projects on hold in part because of a long-awaited rate cut by the Federal Reserve, McPhail said. In late July, Fed Chairman Jerome Powell said policymakers could cut interest rates at the central bank's September meeting if the data supports it.
This would lead to lower mortgage rates and borrowing costs for homeowners who want to add on an addition or finance a project, such as a bathroom renovation.
“What our clients tell their professionals is, ‘Everything I read tells me that interest rates are going to be lower in three to six months,’” McPhail said. “‘Why should I borrow money now to finance the project instead of just waiting a few months?’”
Still, Home Depot leaders emphasize the positive long-term outlook for home improvement, citing the nation’s aging homes, housing shortage and significant property appreciation, particularly during the Covid pandemic years.
According to McPhail, most Home Depot customers are financially healthy and employed, even though they are currently spending less on home improvements.
Shares of Home Depot closed Monday at $345.81. At Monday's close, the company's shares are down less than 1% so far this year, lagging the S&P 500's 12% gain.
– CNBC's Robert Hum contributed to this story.
