Home Depot Store U.S. retail sales beat quarterly expectations on Tuesday, but the economy warned that sales will be weaker than expected in the second half of the year as higher interest rates and consumer uncertainty dampen demand.
The home improvement retailer said it now expects full-year comparable sales to fall 3% to 4% from a year earlier. It had previously forecast comparable sales, a measure that strips out the impact of store openings and closings and other one-time factors, to fall about 1%.
Home Depot’s overall annual sales will get a boost from its recently completed acquisition of SRS Distribution, a company that sells supplies to professionals in landscaping, roofing and pools. Overall sales are expected to increase 2.5% to 3.5%, including the 53rd week of the fiscal year and about $6.4 billion in SRS sales. However, excluding sales from SRS, its new full-year outlook would have lowered revenue.
In an interview with CNBC, Chief Financial Officer Richard McPhail said Home Depot has been facing consumers with a “postponement mentality” since mid-2023. Interest rates have caused them to put off buying and selling homes and borrowing money for larger projects, like kitchen renovations.
However, he said surveys of consumers and home professionals like contractors over the past quarter have picked up another challenge: a more cautious consumer.
“Professionals are telling us that for the first time, their clients are not just delaying loan repayments because of higher financing costs, but they are delaying repayments because of a sense of increased uncertainty in the economy,” he said.
Here's what the company reported compared to what Wall Street expected for the three-month period ended July 28, based on a survey of analysts conducted by LSEG:
Earnings per share: $4.60 vs. $4.49 expected Revenue: $43.18 billion vs. $43.06 billion expected
The company's shares closed up more than 1% on Tuesday.
Home Depot has been riding a wave of retail profits as economists, investors and politicians pay close attention to the health of American consumers and try to forecast the economic outlook, including the possibility of a recession. Despite slowing inflation, high prices — especially for everyday expenses like groceries, energy and housing — continue to frustrate customers. They’ve also become a major talking point in the 2024 campaign.
Consumer signals will continue to emerge this week and next, as is the case with Walmart Earnings reports and retail sales figures for government stocks are due on Thursday. Other retail companies, including goal, Maisie and Best BuyWe will 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 do-it-yourself customers. About 90% of these customers own their own homes.
However, MacPhail said Home Depot is still feeling the impact of consumer uncertainty. He added that the company has seen slowing demand for a wide range of project-related items, including lighting and flooring.
Home Depot's net income in the fiscal second quarter fell to $4.56 billion, or $4.60 a share, from $4.66 billion, or $4.65 a share, in the year-ago period.
Revenue was up slightly from $42.92 billion in the year-ago period.
Comparable sales fell 3.3% in the quarter across businesses and were down 3.6% in the U.S. That was worse than the 2.1% decline analysts had expected, according to StreetAccount.
This marked the seventh consecutive quarter of negative comparable sales at Home Depot.
Shoppers visited Home Depot stores and its website less often, and spent less when they did, during the quarter compared with the year-ago period. Customer transactions fell about 2% and the average ticket fell slightly to $88.90 from $90.07 in the year-ago quarter.
Consumers have put off projects in part because of a widely expected interest rate cut by the Federal Reserve, McPhail said. In late July, Fed Chairman Jerome Powell said policymakers could cut rates at the central bank’s September meeting if the data supports it.
This could lead to lower mortgage rates and borrowing costs for homeowners who want to add 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 come down in three to six months, so why should I borrow to finance the project now instead of just waiting a few months?’” McPhail said.
However, Home Depot leaders emphasized the bright long-term outlook for home improvement, pointing to the nation's aging homes, housing shortages, and strong property value gains, especially during the Covid years.
Most Home Depot customers are still financially healthy and have jobs, even if they are spending less on home improvements right now, McPhail said.
Home Depot shares closed at $345.81 on Monday. By Monday’s close, the company’s shares were down less than 1% so far this year, lagging the S&P 500’s 12% gain.
— CNBC's Robert Home contributed to this story.
