- Home Depot missed Wall Street's revenue expectations for the first time since November 2019.
- The home improvement retailer provided a muted outlook for fiscal 2023 and expects sales growth to be approximately flat.
- The company attributed the flat outlook to a tougher consumer backdrop and a pivot away from goods toward services.
The company also provided a muted outlook for the next year because of a tough consumer backdrop.
Here's what Home Depot posted, compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:
- Earnings per share: $3.30 vs. $3.28 expected
- Revenue: $35.83 billion vs. $35.97 billion expected
It's the first time Home Depot missed Wall Street's revenue expectations since November 2019, before the Covid pandemic. Shares of the company closed down more than 7% down Tuesday.
In the quarter ended Jan. 29, Home Depot reported $35.83 billion in sales, up 0.3% from the year ago period, which saw $35.72 billion in revenue. The retailer's reported net income of $3.36 billion, or $3.30 per share, was also 0.3% higher than the year ago period, which was $3.35 billion, or $3.21 per share.
Amid record levels of inflation, a shift in consumer behavior and a housing market slowdown, the home improvement retailer has repeatedly beat the Street's expectations over the last year but fell a bit short in sales estimates.
The company attributed that solely to a drop in lumber costs, which had surged in price due to nationwide shortages in fiscal 2021 but are now down about 50% year over year.
"But for that we would have been right in line with our expectations," Home Depot CFO Richard McPhail told CNBC.
"After two years of high volatility, we've seen a little more stability in recent weeks and months, but it's hard to predict lumber prices."
Home Depot said it expects sales and comparable sales to be approximately flat for the new fiscal year. It projects an operating margin rate of about 14.5%, which is impacted by a $1 billion investment Home Depot is making in wage growth.
In the quarter, its operating margin was about 33.3%, and executives said they saw "increased pressure from shrink during the back half of the year."
Home Depot expects a mid-single-digit percent decline in diluted earnings per share. If lumber prices remain at current levels for the remainder of the next fiscal year, the company expects 1% "of pressure to comp sales and an insignificant impact to earnings," McPhail said.
"At today's current price, this would imply more pressure in the first half than in the rest of the year," the executive said.
The retailer issued the muted outlook because it expects some pressure in the goods sector and flat consumer spending, McPhail said.
"So we work from kind of a fundamental assumption that consumer spending will be flat. We know that our market has seen a gradual shift that reflects the broader shift in the economy, in consumer spending from goods to services," he said.
"During Covid, we saw a shift into goods. Over the last really almost two years, we've seen a gradual shift back away from goods into services and we think our market has reflected that and we think that that dynamic could put some pressure on our market."
These days, shoppers are using their discretionary dollars toward experiences and travel as many burn through their savings amid consistent inflation. If that shift continues, the company expects the home improvement market to be down low single digits, McPhail told investors on an earnings call.
Still, the company insisted investments Home Depot has made positions it to "take share in any environment" and its confident it'll overcome any market pressures.
Total customer transactions dropped 6% in the quarter compared with the year ago period but the average ticket cost – $90.05 – was up 5.8%. The growth in ticket price was largely driven by inflation across categories and demand for new products, Jeff Kinnaird, the company's executive vice president of merchandising, said during an earnings call.
"After a year of defying gravity, the slowing economy and pressures on consumers have finally caught up with Home Depot," Neil Saunders, managing director of GlobalData, said in a statement.
"To be fair, the final quarter results are not terrible – especially as they come off the back of a long period of extremely good growth – but they nevertheless represent a material slowdown and are the worst quarterly performance in two years."
Saunders said Home Depot's earnings reflect a slowdown in the housing market, which is a key driver of spend for the home improvement sector.
"Unfortunately for Home Depot, the dip in the housing market also coincided with a fall in the number of people undertaking DIY," said Saunders.
"Our data show that the number of improvement projects done by consumers fell over the prior year as people conserved cash for other activities over the holiday period."
Still, despite a relatively stagnant housing market following a red-hot 2021, the retailer thinks high mortgage rates could prove beneficial for its results.
"As mortgage rates increase, we see a kind of an interesting dynamic in homeowners who are happy with their fixed-rate mortgage and then decided to improve in place," said McPhail.
"You just don't have very many willing sellers in the market today ... that is driving the tendency to improve in place."
In the quarter, the company saw positive comps in building materials, plumbing, hardware, tools, outdoor and paint and said big ticket transactions were up 3.8% compared to the year ago period. The company saw strength across categories like portable power, and pipe and fittings, but reported softness in laundry, soft flooring and roofing.
Pro sales outpaced DIY revenue in the quarter, executives said. While its pro backlog for pending projects remained elevated, it's off its peak from last year.
Overall, the company saw $157.4 billion in sales in fiscal 2022, up 4.1% from fiscal 2021, and $17.1 billion in profit, a small jump from $16.4 billion.
Read the full earnings release here.