High interest rates hit Home Depot as consumers hold back

Slow-to-warm spring also a factor in sluggish sales
Aerial photograph of The Home Depot store at Cumberland, across the highway from the company's headquarters. (Hyosub Shin / Hyosub.Shin@ajc.com)



Aerial photograph of The Home Depot store at Cumberland, across the highway from the company's headquarters. (Hyosub Shin / Hyosub.Shin@ajc.com)

Home Depot had revenues of $36.4 billion for the first quarter of its fiscal year, down 2.3% from the same period a year earlier, “punching through” a challenging economy in which high interest rates have discouraged both home sales and home improvements, the company said Tuesday.

The Vinings-based retail giant had net earnings of $3.6 billion during the three months, roughly 7.7% below a year ago, officials said.

A late spring in many parts of the country added to macroeconomic forces that have dampened demand, said Richard McPhail, the company’s chief financial officer, said during a conference call with industry analysts and reporters. “We are punching through the environment, but the macro has been against us for a while now.”

Vinings-based Home Depot is the world’s largest home improvement company, the largest Georgia-based business by sales and the state’s second-largest by the number of employees.

Home Depot has a workforce of about 465,000 operating 2,337 retail stores. The company plans to open about a dozen stores this year, officials said Tuesday.

The huge company, with roots are in consumers and their do-it-yourself projects and smaller contractors doing work for homeowners, has been aggressively expanding efforts to serve larger professionals doing larger and more specialized work.

The rise of interest rates — part of the Federal Reserve’s campaign to chill inflation — has posed a problem for Home Depot from several directions.

Climbing mortgage rates have “locked in” many current homeowners who might otherwise have put their houses on the market. But so many of them made their purchase when rates — and home prices — were much lower. If they were to buy another home, they would face much higher monthly payments.

The result has pushed the rate of housing turnover to “historical lows,” McPhail said during the conference call. “Obviously that puts pressure on our business. When a customer buys and sells a house, there’s no doubt they spend more on our business.”

Stay-in-place owners are continuing to spend money on repairs and small-scale remodeling, fueling sales at Home Depot. But if those same owners want a larger project, renovating kitchens or bathrooms say, they might need to borrow money to pay for the work — and then they confront higher borrowing costs.

The amount of money used by homeowners in lines of credit fell dramatically in the past year, Home Depot officials said.

Even as much as rates have climbed to 23-year highs, for decades before, they were higher. So the company expects they’ll either decline as the Fed eases off the brake, or that consumers will come to accept them and spend on improvements.

“At what point do current interest rates become the new normal?” McPhail said. “At some point, spending on housing shifts from something discretionary to something that you must do.”

Home Depot officials project that sales for the full fiscal year will edge up about 1% from last year’s total.

In the wake of the earnings announcement, Ana Garcia, an analyst with CFRA Research, maintained her advice for clients to continue holding Home Depot shares they already own.

While relatively optimistic about the long-term, that rating is less enthusiastic than a suggestion to accumulate more shares. The company is well-run, but as it moves through its 2025 fiscal year, its customers will likely continue to face high interest rates. which will be a headwind to growth, Garcia said.

“We think HD has room to flex its operational muscle, but it will be limited by sales,” she said. “We do not see rate cuts translating to meaningful demand.”

In midafternoon Tuesday, Home Depot was trading at $327.29 a share, down $3.65 a share since the opening. The stock reached its 12-month low of $376.46 in late October — just as mortgage rates were at their high.

In the months that followed, Home Depot shares rose, cresting at $395.20 a share in March before slipping.

Officials Tuesday shrugged off the effects of a delayed start to warmer weather, which typically spurs more home improvements and more spending at Home Depot. Sooner or later, the spring will come, they said.

“Our biggest selling weeks are ahead of us,” said Ted Decker, the company’s chief executive.

Home Depot snapshot

Revenues, last fiscal year: $152.7 billion

Revenues, recent quarter: $36.4 billion

Employees overall: 465,000

Employees, Georgia: 33,000

Number of stores, overall: 2,337

Number of stores, Georgia: 90

Source: Home Depot