Home Depot still cruising through inflation, housing bust

Home Depot on Tuesday reported strong sales and earnings for the quarter just ended, a sign that inflation hasn’t crimped consumer spending yet, while the housing slump has hardly hurt homeowners or damaged the company’s business.

The Vinings-based company is a barometer for the broader economy, and outdid most analyst expectations. Home Depot recorded sales of $38.9 billion for its third fiscal quarter, up 5.6% compared to the same period a year earlier, with net earnings of $4.3 billion, an 8.2% rise from last year.

“We can speak to the health of the homeowner,” Richard McPhail, the company’s chief financial officer, told The Atlanta Journal-Constitution. “Prices have appreciated 40% in the past three years, and home equity is up $10 trillion. You likely have a job and solid income growth.”

The company has so far weathered a bumpy economy, growing despite inflation, uncertainty and a rate-raising campaign by the Federal Reserve aimed at taming inflation by dampening growth. For the near future, those rate hikes are “probably the largest consideration,” McPhail said.

Inflation, which had been running through much of 2022 at 40-year highs, has eased for some products like lumber, but is still far higher than pre-pandemic, he said. “We are seeing some slight disinflation in certain categories, but inflation remains persistently high.”

Home Depot, the largest company based in Georgia, has 90 stores and more than 27,000 employees in the state. Overall, the company has a half-million employees and 2,319 stores, but has only added three in the past year, growing mostly by snaring more spending by homeowners and the contractors they employ.

During a conference call with analysts and reporters, Home Depot officials said that they expect to finish this fiscal year with sales up 3% while earnings per share growth in the mid-single digits.

“In general, we’ve seen our customers be resilient — more resilient than we expected,” McPhail said.

So far, consumer spending has held steady. Atlanta shoppers plan to spend on average $771 during the coming holiday season, up very slightly from last year, according to global consulting company Accenture.

And while rising interest rates have tanked home sales and blunted the rise in home prices, the environment is radically different from the 2007-09 recession, McPhail said.

Back then, homeowner finances were shaky and foreclosures were epidemic. Now, owners have high equity in homes with values that have soared and they are typically in good financial shape. And with the market sliding, they are more likely to stay in their homes, spending money on renovations and improvements.

That money is sometimes spent directly by do-it-yourself homeowners, sometimes by professional contractors, but it is fueled by home values and the well-being of consumers.

Analyst Shoggi M. Ezeizat at research firm Third Bridge said that even if the broader economy slows more, Home Depot’s size gives it an advantage over smaller competitors, he said. They “can afford to be more aggressive in their discounting and promotional activities than many of their competitors. Our experts expect a lot of smaller, regional, players to go bust if this downturn gets ugly.”

Higher prices could still pose a threat to profits if do-it-yourselfers try to switch to cheaper substitutes, Ezeizat said. “The biggest risk facing Home Depot is longer-term margin compression due to consumer trade downs in the DIY segment.”

But it hasn’t happened yet, the company said: The typical Home Depot customer has kept right on buying.

Home Depot stock traded as high as $420.61 in the past year, but like much of the market, it slid hard through much of the year hitting a low of $266.58 in September. Since then it has trended up.

Kenneth Leon, the research director at CFRA Research, said he is upbeat on the stock, endorsing Home Depot as a “buy.” He predicts the share price will reach $350 in the next 12 months.

Home Depot quarterly revenues (billions of dollars)

Third quarter*: $38.9

Second quarter: $43.8

First quarter: $38.9

Fourth quarter: $35.7

*Reported Tuesday

Source: The Home Depot