Home Depot cuts outlook as softening demand hits first quarter sales

By Olivia Rockeman
 

Home Depot Inc. cut its outlook for the year after first-quarter sales dropped more than expected, a sign that economic uncertainty is leading to a pullback in home-improvement spending.
 

The company now expects comparable sales to decline as much as 5% this fiscal year — the first annual fall in 14 years — following a bad start to the year affected by lumber deflation and poor weather, it said Tuesday. Home Depot, which previously predicted sales would remain flat this year, said demand is softening more than it had expected. 

The first-quarter results show the company’s performance is starting to lag after several years of soaring home-improvement spending that was sparked by a booming housing market and stimulus payments that let consumers invest in their homes during pandemic restrictions. That binge has now begun to slow amid rising inflation and interest rates.

The stock was down 1.5% as of 10:01 a.m. in New York. Competitor Lowe’s Cos., which reports earnings next week, fell 1.9%. 

“We grew almost 43% over the last three years and we knew that 2023 was going to be a year of moderation as we digested those gains,” Home Depot Chief Financial Officer Richard McPhail said in an interview. “What we’re seeing now is a more broad-based pullback on the part of the consumer with respect to discretionary spend. This is at least an indirect result of tighter monetary policy and tighter borrowing conditions.”

Categories including mill work, building materials, hardware and plumbing have remained strong, while big-ticket discretionary products like grills and patio sets are softer than expected, McPhail said. He also noted that home-improvement projects are getting smaller.

Earnings per share, at $3.82 in the first quarter, could now slip as much as 13% this year, compared with a previous estimate of a mid-single-digit percentage drop, the company said. Net income declined to $3.9 billion from $4.2 billion during the same period in fiscal 2022. The comparable-sales decline of 4.5% was much worse than the 1.4% drop analysts had expected.

Analysts largely see Home Depot as resilient in the long term due to still-high home prices and ongoing remodeling activity as many continue to work from home. 

A separate report Tuesday showed that sales at building-materials retailers rose 0.5% between March and April, but were down 3.7% from a year ago, according to data from the US Commerce Department.

Home Depot is the first of the major US big-box retailers to report first-quarter earnings. Target Corp. and TJX Cos. will release results on Wednesday, followed by industry benchmark Walmart Inc. on Thursday.