Home Depot’s sales have continued to decline amidst ongoing inflation concerns, leading the company to revise its outlook for the year. However, despite these challenges, the largest home improvement retailer in the United States exceeded expectations for the quarter.
Home Depot now anticipates a decline in earnings per share ranging from 9% to 11% in 2023, with same-store sales projected to fall between 3% and 4%. These numbers reflect a narrower range compared to the company’s previous forecast of a 7% to 13% drop in earnings per share and a 2% to 5% decline in same-store sales.
This marks the first time since 2009, during the aftermath of the housing bubble, that Home Depot has projected a decrease in annual sales. The impact of inflation is being felt in various aspects of the company’s operations.
As costs continue to rise, Americans are becoming more cautious with their spending habits. At Home Depot, the average receipt has decreased by 0.3% compared to the previous year’s figures, and customer transactions have dropped by 2.4%. Additionally, it has become costlier to make significant purchases using credit cards or loans due to the U.S. Federal Reserve’s efforts to combat inflation.
Furthermore, as the Federal Reserve raises interest rates to address inflation and cool down the economy, the real estate market has been negatively affected, which consequently impacts Home Depot’s prospects. Fewer people are moving from their homes after securing ultra-low mortgages at or below 3%. Currently, the average rate on a 30-year home loan is more than double that figure.
In September, sales of previously owned homes in the United States declined for the fourth consecutive month, reaching their slowest pace in over ten years. Sales of newly built homes are also falling, albeit for different reasons.
The shortage of existing homes available for sale has resulted in a greater number of individuals entering the new home market or leaving the housing market altogether due to skyrocketing prices. Both scenarios can harm companies like Home Depot.
During the third quarter, Home Depot reported a 3% decrease in revenue, with total revenue amounting to $37.71 billion. This figure exceeded the Wall Street estimate of $37.52 billion, according to a survey conducted by Zacks Investment Research.
Comparable sales, an important gauge of a retailer’s health, decreased by 3.1%, with a 3.5% decline in the United States specifically.
Customers, in comparison to previous years when major home renovations were commonplace, are now focusing on smaller, more affordable projects. Home Depot’s Chairman and CEO, Ted Decker, acknowledged this trend, stating that the company continued to see engagement from customers in smaller projects but experienced pressure in certain high-priced discretionary categories.
One such category includes appliances, which many customers frequently purchase using credit. However, the rising interest rates resulting from the Federal Reserve’s actions against inflation have made credit more expensive. Over the past year and a half, the Federal Reserve has raised its benchmark interest rate eleven times, bringing it to approximately 5.4%, the highest in twenty-two years. Consequently, the costs of mortgages, credit cards typically used for acquiring appliances, and home improvement loans have increased.
Neil Saunders, the managing director of GlobalData, attributed the decline in spending on do-it-yourself projects to the fact that more people are choosing to stay in their homes rather than move. Consequently, there is a decrease in investment in larger projects like major remodels, as financing becomes more challenging due to lower confidence and higher interest rates.
Saunders suggests that this situation will likely persist until there is an improvement in the economy or until backlogged work accumulates sufficiently to generate latent demand, a scenario he believes is unlikely to happen anytime soon.
Home Depot reported earnings of $3.81 billion, or $3.81 per share, surpassing industry analysts’ expectations of $3.76 per share. However, this represents a decline from the previous year when the company earned $4.34 billion, or $4.24 per share.
Before the market opened, Home Depot’s shares experienced a slight increase, as did the shares of its competitor Lowe’s, which is set to release its quarterly earnings in one week.