Three-year robust sales run ends amid pull back on home improvements

Home Depot couldn’t keep its protracted robust sales streak going any longer. The home improvement chain reported a small quarter as consumer spending on home improvement projects – which was buoyed by the stay-at-home pandemic lifestyle – coming to a screeching halt.

The retailer posted disappointing sales for its first quarter and lowered its outlook for the year after customers slowed their spending. Home Depot (HD) said sales fell 4.5% at least a year at stores open during its latest quarter, and its income decreased 6.4% from the same stretch a year ago.

Total revenue for the quarter slipped 4.2% versus a year ago, to $37.3 billion. The retailer also cited falling lumber prices and weather-related challenges, including heavy rains in California during the period, to clink its sales.

“After a three-year period of unprecedented growth for our sector, during which we grew sales by over $47 billion, we expected that fiscal 2023 would be a year of moderation for the home improvement market,” Home Depot CEO Ted Decker said Tuesday.

The company also lowered its sales expectations for the year. It expects sales to decline between 2% and 5% in 2023 from a year prior.

The change in the tide for Home Depot comes after a long period where it was among a few big winners during the pandemic. Spending on homes became a priority for families as many Americans suddenly found themselves living, working and studying from home.

But just as people have returned to some semblance of a post-pandemic life, for Home Depot, it’s been less of a celebration. The money that was perhaps previously earmarked for spending on fixing and beautifying the home is now being spent more freely on eating out, traveling, shopping and other indulgences.

As a result, Decker told analysts during a call held Tuesday to discuss the company’s earnings that business from both its DIY customers and professional contractors in the quarter was less than expected, as consumers continue to take on smaller home improvement projects. In addition, higher interest rates and inflation are taking a toll.

“What was newer in our observations this quarter is that while the projects are still strong and the Pro project backlog is still elevated, the size of the projects are getting a bit smaller,” Decker said during the call. “And it could be that the projects are being deferred or it could be that the projects are being broken up into chunks. So, rather than doing an entire room or an entire basement, you start working the way at it in smaller chunks. And that clearly impacts items per basket in overall activity.”

Managing Director with Global Data and retail expert Neil Saunders said in a note Tuesday that Home Depot’s slowing sales pace “is somewhat worrying as it reflects an underlying softness which is creeping into the economy.”

He said slowing activity in the housing market “as higher interest rates deter some from either refinancing to move or taking out mortgages for their first homes” can have a chilling knock-on effect on the home improvement category.

“The second factor is the general deterioration in spending even among those who are not moving,” said Saunders. “The number of households undertaking projects continued to decline this quarter as people rein back discretionary spending and put off big remodels which sometimes require financing.”

Holding off on big ticket appliances

Home Depot shoppers said are also restraining from purchasing bigger, more expensive appliances.

“We saw a continuation of the trend we observed in the fourth quarter with consumers pulling back on big tickets and some discretionary types of purchases,” said Billy Bastek, Home Depot’s executive vice president of merchandising.

Bastek said demand in the quarter softened in categories such as flooring, kitchen and bath. “After a couple of years of unprecedented demand, we continue to see softness in big-ticket discretionary categories like patios, grills and appliances that are likely to reflect a difference in these single item purchases.”

The retailers said consumers are now heading into a transitional period.

“Obviously, people aren’t spending all their time at home as they did in the prior few years,” said Decker. “And then a newer dynamic now that we’re really seeing, is just this past quarter is a more cautious consumer and that aligns with what we’re observing in our business. And then lastly, with the buildup of inflation that we’ve seen, there’s certainly some price sensitivity, particularly with respect to those bigger ticket discretionary items….But regardless of all that, we’ll get through this transition period.”

Target (CBDY), Walmart (WMT) and other retailers also report earnings this week, giving investors and economists more data about sentiment among US consumers.

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