Home Depot cuts outlook with consumers in 'deferral mindset'

Home Depot Inc. lowered its forecast of a key sales metric for the year on expectations that consumers will continue to hold back spending in the coming months.

The retailer said it now sees comparable sales falling 3% to 4% for the year versus the previous expectation for a 1% decline across online sales and stores open at least a year. That was below the average analyst estimate compiled by Bloomberg. The company also expects adjusted earnings per share to be 1% to 3% lower for the year. 

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Against the backdrop of high interest rates and inflation, consumers have held off buying homes or pursuing bigger renovations that typically need financing. This pullback in spending has hurt Home Depot and other retailers, a reversal from the pandemic when people upgraded their houses. 

"It's simply a story of a deferral mindset among our customers who have the means to spend," but are waiting to do so until interest rates decline, Chief Financial Officer Richard McPhail said in an interview.

Consumers have shown more sensitivity to economic uncertainty as the year has progressed, hurting demand, he said. People are spending on paint and other smaller projects but remain on the sidelines for bigger, discretionary purchases including kitchen or bath remodels. Professional customers are outperforming do-it-yourself customers, McPhail added.

Home Depot shares rose less than 1% at 10:30 a.m. on Tuesday in New York. The stock was also little changed year to date, while the S&P 500 Index has risen 12% as of Monday's close. Shares of rival Lowe's Cos. were also little changed on Tuesday.

The Atlanta-based company, which operates more than 2,300 stores, said comparable sales fell 3.3%, the seventh straight quarter of declines. That drop was worse than Wall Street's expectations. Adjusted earnings per share of $4.67 came in slightly above analysts' estimates for the second quarter.

"When we look at the performance in the first six months of the year, as well as continued uncertainty around underlying consumer demand, we believe a more cautious sales outlook is warranted for the year," Chief Executive Officer Ted Decker said on an earnings call with analysts. 

Home Depot executives said on the call that demand fell last quarter for large projects tied to construction, squeezing categories like lumber. People spent less per shopping trip on average as transactions of more than $1,000 fell. 

At the same time, consumers are trading up for new, innovative products. Items like outdoor power equipment and water heaters have been popular, executives said.

The company does expect to see more activity in the housing market as mortgage rates start dipping toward 6%. 

Consumer-product companies so far have posted weak results this earnings season, as price increases slow and shoppers remain budget-conscious. The Federal Reserve has signaled it may start cutting interest rates next month, but that won't immediately lift sales for Home Depot and other retailers that are set to release earnings in the coming weeks. Some retailers like Walmart Inc., by contrast, are expected to stay resilient thanks to budget-conscious consumers who are prioritizing essentials and seeking lower prices. The company is set to report earnings on Thursday.  

In the meantime, Home Depot has been investing in areas of the operation that can help the company gain long-term market share: professional business, supply chain and digital.

During the latest quarter, Home Depot closed its acquisition of building products provider SRS Distribution for about $18 billion. The deal will expand the company's footprint with professional contractors who work on pricier constructions than do-it-yourself projects – a lucrative market its smaller competitor Lowe's is also chasing. 

"Big picture, despite the near-term macro uncertainty, we think HD remains well positioned to navigate the current backdrop, and come out stronger on the other side of the cycle," wrote TD Cowen analyst Max Rakhlenko.

Fundamentals of the business remain strong and the company will continue to invest, McPhail said, adding that homeowners are unlikely to change their view on what's important to them regardless of the outcome of the upcoming U.S. election.