Home Depot hits a rough patch to start year; sales disappoint

Credit: AP

Credit: AP

Home improvement giant foresees decline in 2023 sales and earnings compared to last year

After three years of sometimes spectacular growth, Home Depot’s business developed something of a leaky roof in the past three months, plagued by bad weather, erratic lumber prices and suddenly cautious consumers.

The Vinings-based home improvement giant on Tuesday reported revenues of $37.3 billion for its first quarter, down 4.2% from the same three months a year ago, while net earnings were $3.9 billion, down about 7%.

Moreover, the company predicted sales and earnings for the year will likely fall compared to 2022.

“We expected that fiscal 2023 would be a year of moderation for the home improvement market,” said Ted Decker, company chief executive during a conference call with industry analysts and reporters. “We also observed more broad-based pressure across the business, compared to a few months ago.”

Home Depot will finish the year with sales between 2% and 5% lower than last year, while profit margins shrink modestly, he said.

The company has about 475,000 employees and 2,324 retail stores, while also increasingly doing business online.

During the pandemic, Home Depot’s business surged as tens of millions of Americans spent extra time at home, throwing time and money into improvements and maintenance. In three years, sales grew by more than $47 billion, with healthy increases coming from both professional contractors and homeowners.

The past winter brought some headwinds.

Severe weather in the western United States — including heavy rains in some areas and snow in southern California — hampered purchases for home improvement. Meanwhile, drops in lumber prices have meant Home Depot has had to cut some of its own prices, too.

More crucial are changes in consumer demand.

With many companies in hybrid mode or completely back in the office, many Americans are spending less time at home. And while inflation has ebbed from the crest of last summer, it continues to chew at consumer purchasing power.

In addition, uncertainty continues to hover over the economy, especially with the Federal Reserve signaling a determination to keep raising interest rates.

Purchases of “big-ticket” items are down, either because consumers are cutting back or because they prefer to divvy up projects into smaller, more digestible bites, said company officials.

“There has been a transition period,” said Richard McPhail, Home Depot’s chief financial officer. “We are going to learn a lot over the next few weeks in terms of underlying demand.”

Still, no one is predicting serious trouble for Home Depot. With the job market robust, most household finances are in good shape and most of the company’s customers are homeowners.

The woes in the housing market are not necessarily a problem for the company.

Relatively few homes are being listed for sale, which is a challenge for potential buyers. The reluctance to sell is partly because the vast majority of Americans with mortgages have loans at less than 6.5% interest. So they hesitate to sell, knowing they’d have a more expensive mortgage for anything else they buy.

But as long-time homeowners — especially for those with older homes — stay put, it’s more likely they will spend money on improvements and maintenance, said analyst Shoggi Ezeizat at Third Bridge. “With a shortage of available homes and many existing homes in need of renovation, the market fundamentals are strong.”

Home Depot stock fell in early trading Tuesday, but partly rebounded. Shares were trading at midday a little above $285. In the past year, shares of Home Depot have traded as high as $339.79 and as low as $266.58.

Analyst Ana Garcia at CFRA said Tuesday her long-term view of Home Depot was positive, but added that the company faced “near-term headwinds.” She lowered her recommendation on the company stock from “buy” to “hold.”

Home Depot’s first quarter at a glance

Sales: $37.3 billion

Net earnings: $3.9 billion

Retail stores: 2,324

Employees: 475,000

Headquarters: Vinings