Home Depot sales continue to slide but the biggest home improvement chain still tops expectations

Home Depot sales continue to slide as Americans wrestle with persistent inflation and the company narrowed its outlook for the year. But the nation’s biggest home improvement retailer still topped expectations for the quarter and shares jumped more than 5% Tuesday.

Home Depot now expects an earnings per share to decline between 9% and 11% in 2023 and same store sales to fall 3% to 4%. The company previously anticipated an earnings per share drop between 7% and 13% and a same-store sales decline of 2% to 5%.

It’s the first time that Home Depot has projected a decline in annual sales since 2009, when the U.S. economy was decimated by a massive housing bubble.

Inflation is hitting Home Depot on a number of fronts.

Americans are more closely watching where they spend money as costs rise. The average receipt at Home Depot declined 0.3% from last year during the same period, and customer transactions are down 2.4%. It is also getting more expensive to put big-ticket items on credit cards or to take out a loan to buy them, a result of the fight by the U.S. Federal Reserve against inflation.

Secondly, as the Fed has raised interest rates to cool the economy and inflation, it has fractured the real estate market, the health of which is a big determinant in Home Depot’s fortunes.

Few people are moving from their homes after locking in ultralow mortgages at or below 3%. The average rate on the benchmark 30-year home loan is more than twice that now.

Sales of previously occupied U.S. homes in September fell for the fourth month in a row, grinding to their slowest pace in more than a decade. Sales of new homes are falling, too, but for much different reasons.

The lack of existing homes for sale has forced more people into the new home market, or out of the housing market completely as prices skyrocket. Both can impact a company like Home Depot negatively.

The impact of inflation and monetary policy on a company like Home Depot played out in real time Tuesday after the U.S. released the latest data on inflation, which eased in October. Shares of Home Depot that had been trading flat jumped in early trading.

Third-quarter revenue slipped 3% to $37.71 billion, Home Depot Inc. said Tuesday, which is better than the $37.52 billion that Wall Street was expecting, according to a survey of analysts by Zacks Investment Research.

Sales at stores open at least a year, a key gauge of a retailer’s health, dropped 3.1%. In the U.S., they declined 3.5%.

Customers, compared with several years ago when they were taking on major renovations at home, focused instead on smaller, less expensive projects.

“Similar to the second quarter, we saw continued customer engagement with smaller projects, and experienced pressure in certain big-ticket, discretionary categories,” Chair and CEO Ted Decker said in a prepared statement.

Big-ticket items include appliances that many customers buy through credit, which has grown very expensive as a result of the fight by the U.S. Federal Reserve to rein in inflation. The Fed has raised its benchmark interest rate 11 times in the past year and a half, to about 5.4%, the highest level in 22 years.

That has raised the cost of mortgages, credit cards typically used to acquire refrigerators, and loans for home improvement.

Neil Saunders, managing director of GlobalData, said that because more people are staying put in their homes, it’s taking a bite out of spending on do-it-yourself projects, most of which are taken up after a move. Those who aren’t moving aren’t spending on larger projects, like major remodels, either.

“A lack of financing, softer confidence, and higher interest rates which impact borrowing to fund such activity, are all underpinning the decline,” Saunders said. “In our view, the situation will only remedy itself once the economy picks up or the backlog of work builds to an extent that it fuels latent demand – which will not happen any time soon.”

Home Depot earned $3.81 billion, or $3.81 per share, topping the $3.76 per share that industry analysts had expected, but it’s down from last year when the Atlanta company earned $4.34 billion, or $4.24 per share.

Its shares ended Tuesday up $15.56 at $303.63. Shares of competitor Lowe’s, which releases quarterly earnings a week from today, rose $8.40, or 4.3%, to $202.24.