On Tuesday, August 13, Home Depot warned that consumers are feeling disappointed by the economic conditions, leading to subdued discretionary spending, which is hampering the recovery of consumer confidence this year. This has resulted in a projected decline in the company’s annual profits, and the drop in comparable sales for the year could be even larger.
As a barometer for consumer spending and the real estate market, the home improvement giant has revised down its sales expectations for this year. The company stated that consumers have reduced their spending on home improvement projects due to rising interest rates and a deteriorating economic outlook.
Home Depot’s business is closely tied to the real estate market. With increasing borrowing costs and heightened inflation, Americans have been postponing major renovation projects such as flooring, kitchen cabinets, and bathrooms. Rising mortgage rates and housing prices have also negatively impacted new home sales.
Home Depot’s CEO Ted Decker expressed in a press release, “In this quarter, rising interest rates and increased macroeconomic uncertainty have put broad-based pressure on consumer demand, resulting in reduced spending on home improvement projects.”
The company reported a 3.6% decline in sales at stores open for at least a year in the previous quarter. It anticipates a 3%-4% decrease in sales for stores open at least 12 months compared to last year, significantly larger than the earlier estimated 1% decline.
Home Depot expects a 2%-4% decline in annual earnings per share, whereas the previous forecast predicted a 1% increase. Diluted earnings per share are also projected to decrease by 2%-4%.
In an interview with CNBC, Home Depot’s CFO Richard McPhail mentioned that since mid-2023, the company has been contending with consumers having a “delay mentality”. The increase in interest rates has caused them to postpone buying or selling homes and borrowing for major projects like kitchen renovations.
However, in the past quarter, he noted another challenge based on surveys with customers and home professionals such as contractors: consumers are being more cautious.
“Professionals tell us this is the first time their customers are delaying not just because of higher financing costs,” he said. “They’re delaying because of greater economic uncertainty.”
Analyst Seth Basham from Wedbush mentioned in a report that the revised forecasts by Home Depot appear reasonable and, while not conservative, they should help mitigate risks for the company’s future outlook and stock performance.
Following the acquisition of SRS Distribution, a building materials supplier, in June, Home Depot is increasing its investment in professional builders as well as roofers, landscapers, and pool contractors to counterbalance the impact of soft demand from individual customers.
Home Depot’s stock price dropped by 4.7% before the market opened on Tuesday.
Retailers in the home improvement sector like Home Depot have been grappling with homeowners postponing major projects due to rising interest rates and concerns about inflation.
The increase in mortgage rates can add hundreds of dollars to borrowers’ monthly costs, dissuading Americans from making home purchases, thus prolonging the slump in the US real estate market for a third year.
In June, existing home sales in the US declined for the fourth consecutive month. Last month, the sales of new single-family homes dropped to the lowest annual rate since November.
Consumer demand for home renovations has remained subdued for about a year, and Home Depot stated that the situation has not changed significantly. However, Decker remains optimistic, stating, “The underlying long-term fundamentals supporting demand for home improvement remain strong.”
“Everyone expects rates to come down. So they’re delaying those larger projects,” Decker mentioned during an earnings conference call.
During the peak of the pandemic, millions of people who spent more time at home turned to remodeling and other home improvement projects, which led to a surge in Home Depot’s sales. However, many consumers have since shifted from purchasing physical goods to experiences like travel and concerts, while others have cut back on general spending. This transition has been detrimental to Home Depot. Brands like McDonald’s, Starbucks, Disney, and other consumer brands have also noticed the pullback from consumers.
Economists, investors, and politicians are closely monitoring the health of American consumers in order to predict economic prospects, including the possibility of an economic recession.
Although inflation has cooled off, rising prices, particularly in everyday costs like groceries, energy, and housing, continue to frustrate consumers. These factors have become key topics in the 2024 presidential campaign.
Last week, McDonald’s reported a 0.7% decrease in sales in the US compared to the same period in 2023, with a persistently bleak performance in the second quarter. Airbnb released lower-than-expected earnings for the second quarter and indicated that the future operations will face more challenges. Disney’s theme park business unexpectedly showed weakness. Disney CFO Hugh Johnston stated last week, “Low-income consumers are feeling (price) pressure, while high-income consumers are traveling abroad.”
As Walmart reports earnings and the government releases retail sales data on Thursday, clues about consumer sentiment for this week and next will continue to emerge. Other retailers, including Target, Macy’s, and Best Buy, will also announce their performances in the coming weeks.
(This article references reports from Reuters and CNN)