Home Depot On Tuesday, it reported quarterly revenues below Wall Street expectations, as shoppers postponed larger discretionary projects such as bathroom and kitchen remodels due to rising interest rates and made late spring purchases.
However, the home improvement retailer reaffirmed its full-year guidance, which includes an additional week over the previous year. It said it expects total sales to grow about 1% in fiscal 2024, including those additional days. However, the retailer said it expects comparable sales, which take into account the impact of store openings and closings, to decline by about 1%, excluding this additional week.
In an interview with CNBC, CFO Richard McPhail said customers were in a waiting game that began in the second half of last year, as they responded to rising mortgage rates. He said the company expects these trends to continue.
“The home improvement client is very healthy financially,” he said. “So it's not a matter of not being able to spend. What they're telling us is that they are simply postponing these projects due to high interest rates, but it doesn't seem like this is the right moment to implement.”
The logo of US home improvement chain Home Depot in Mexico City, Mexico on January 15, 2020.
Luis Curtis | Reuters
Here's what the company reported for the three-month period ending April 28 compared to what Wall Street expected, based on a survey of analysts conducted by LSEG:
Earnings per share: $3.63 vs. $3.60 expected Revenue: $36.42 billion vs. $36.66 billion expected
Net income for the fiscal first quarter fell to $3.6 billion, or $3.63 per share, from $3.87 billion, or $3.82 per share, in the same period last year. Net sales fell 2.3% from $37.26 billion.
Comparable sales were down 2.8% in the fiscal first quarter across the business and were down 3.2% in the US.
Home Depot faces a tougher housing backdrop, which has weakened demand for do-it-yourself projects. Nearly half of Home Depot's sales come from DIY customers, and the other half come from professionals such as roofers and landscapers.
As interest rates continue to rise, consumers have become reluctant to move out of their homes and into new homes — the kind of sales volume that often inspires home projects. High interest rates have also weakened the appetite for large-scale projects that may require financing. Over the past few quarters, Home Depot has seen customers buy fewer big-ticket items and embrace more modest projects – a trend that continued last quarter.
In the fiscal first quarter, customers made fewer visits to Home Depot's stores and website and tended to spend less money when they did. Customer transactions fell 1% to 386.8 million and the average ticket fell 1.3% to $90.68.
Home Depot has seen moderate sales after more than two years of overwhelming demand during the Covid pandemic. The company posted its worst revenue loss in nearly two decades and cut its forecast in the first quarter of last year. Home Depot's sales totaled $152.7 billion in the fiscal year ending in late January, a decline of 3% from the previous year.
Inflation may also play a role in this decline, as consumers spend more money on basics and are forced to make trade-offs when spending discretionary income.
However, Home Depot does not see customers trading up for cheaper items, such as less expensive tools or electrical appliances, McPhail said. He attributed the company's weak sales largely to consumers' “deferral mentality” and a housing market that has slowed dramatically.
“When we see a slight decline in mortgage rates, as we saw at the beginning of this quarter, housing turnover appears to respond quickly and sharply in a positive direction,” he said. “So we think this is an indicator that there is a tremendous amount of pent-up demand for family formation, housing turnover and larger projects associated with housing turnover.”
The weather also pressured sales last quarter, he said. Spring is the biggest sales season for home improvement retailers, including Home Depot. He added that customers delayed their overseas purchases due to the cold and wet weather in many parts of the country.
Spring shopping is starting to pick up as the weather improves, he said.
To combat sluggish sales, the home improvement retailer has accelerated its strategy to attract professionals, since they tend to buy in larger quantities and offer a more consistent source of sales. Home Depot has a growing network of distribution centers across the country that can stock and deliver roofing shingles, insulation and other supplies directly to job sites. It announced in late March that it would acquire SRS Distribution, a Texas-based distributor of roofing, landscaping and pool supplies, for $18.25 billion in the largest acquisition in the company's history.
The deal remains on track to close for the current fiscal year, which ends in early February, McPhail said.
Besides attracting professionals, Home Depot is trying to drive growth by opening about a dozen new stores this fiscal year and adding features to improve its online and in-store experience.
MacPhail said some business dynamics have improved, even as sales have declined. Home Depot stores are fully staffed and have their best inventory levels in years, he said. Transportation costs decreased. While organized retail crime remains a challenge for the industry, he said shrinkage, a term for lost, stolen or damaged items, has declined at Home Depot year over year as well.
Home Depot has also added technology to ensure it has items on shelves when customers need them. For example, it uses computer vision to ensure products for sale are free of damage and to prevent theft when customers use self-checkout, Anne Marie Campbell, a senior executive vice president who oversees stores and U.S. operations, said on the company's website. Earnings call.
Home Depot shares closed Monday at $340.96. So far this year, Home Depot shares are down about 2% compared to the S&P 500's gain of about 9%.
