Home Depot is losing revenue as high interest rates hurt sales

Home warehouse on Tuesday saw quarterly revenue below Wall Street expectations as buyers postponed larger, discretionary projects such as bathroom and kitchen remodels due to higher interest rates and delayed spring shopping.

Still, the home furnishings retailer reaffirmed its full-year outlook, which includes an extra week compared to last year. It said it expects total sales to raise by about 1% in fiscal 2024, accounting for these additional days. However, the retailer said it expects comparable sales, which include the impact of store openings and closings, to decline by about 1%, excluding the additional week.

In an interview with CNBC, Chief Financial Officer Richard McPhail said customers are in a waiting game that began in the second half of last year in response to rising mortgage rates. He said the company expects these trends to continue.

“The home improvement customer is extremely hearty from a financial standpoint,” he said. “So it’s not about not being able to spend money. They tell us they are simply postponing these projects because of the higher rates, but it just doesn’t seem like the right time to do them.”

These are the company’s reports for the three-month period ended April 28 compared to Wall Street expectations, based on a survey of analysts conducted by LSEG:

• Earnings per share: $3.63 vs. expected $3.60

• Income: $36.42 billion against the expected $36.66 billion

Net income for the fiscal first quarter fell to $3.6 billion, or $3.63 per share, from $3.87 billion, or $3.82 per share, in the same period last year. Net sales fell 2.3% from $37.26 billion.

Enterprise-wide comparable sales declined 2.8% in the fiscal first quarter and 3.2% in the U.S.

Home Depot is struggling with a tighter housing situation that has reduced demand for do-it-yourself projects. About half of Home Depot’s sales come from do-it-yourself customers and the other half from professionals such as roofers and landscapers.

As interest rates remain high, consumers are reluctant to move from their homes to novel ones – and this type of turnover often inspires housing projects. Higher interest rates have also reduced the willingness to pursue larger-scale projects that may require financing. Over the past few quarters, Home Depot customers have been buying fewer big-ticket items and taking on more modest projects, a trend that continued into the final quarter.

In the fiscal first quarter, customers visited Home Depot stores and the website less often and spent less. Customer transactions fell 1% to 386.8 million and average ticket value fell 1.3% to $90.68.

Home Depot reported moderate sales levels after more than two years of soaring demand during the Covid pandemic. The company reported its worst revenue decline in nearly two decades and lowered its forecast in the first quarter of last year. For the fiscal year that ended in delayed January, Home Depot’s sales were $152.7 billion, down 3% from the previous year.

Inflation may also play a role in this slowdown as consumers spend more money on necessities and have to make trade-offs when spending discretionary income.

But McPhail said Home Depot doesn’t see customers switching to cheaper products, such as cheaper power tools or appliances. He attributed the company’s weaker sales largely to a “consumer postponement mindset” and a dramatic slowdown in the housing market.

“When we have seen a slight decline in mortgage rates, as we saw earlier this quarter, residential real estate seems to be responding quickly and clearly in a positive direction,” he said. “We think this is an indicator that there is a huge amount of pent-up demand for household formation and residential real estate and larger real estate projects.”

He said weather also put pressure on sales in the last quarter. Spring is the biggest sales season for home improvement retailers, including Home Depot. However, customers are delaying outdoor shopping due to colder and wetter weather in many parts of the country, he added.

He added that spring shopping began to pick up as the weather improved.

To overcome slower sales, the home furnishings retailer has improved its strategy to attract professionals because they tend to buy larger volumes and offer a more stable source of sales. Home Depot has a growing network of distribution centers across the country that can store and deliver roofing shingles, insulation and other materials directly to job sites. In delayed March, it announced it would acquire SRS Distribution, a Texas-based specialty distributor of roofing, landscaping and swimming pool supplies, for $18.25 billion in the largest acquisition in the company’s history.

McPhail said the deal is still on track to close this fiscal year, which ends in early February.

In addition to recruiting professionals, Home Depot is seeking to drive growth by opening a dozen novel stores this fiscal year and adding features to improve the online and in-store experience.

McPhail said some business momentum had improved even though sales were down. House said Depot stores are fully staffed and have the highest inventory levels in years. Transport costs have fallen. While organized retail crime remains a challenge for the industry, he said “chicken,” a term referring to items that are lost, stolen or damaged, has also been sinking year over year at Home Depot.

Home Depot also added technology to make sure products are on shelves when customers need them. For example, it uses computer vision to make sure products for sale are free from damage and prevent theft when customers utilize self-checkout, Ann-Marie Campbell, a senior executive vice president who oversees U.S. stores and operations, said of the company earnings call.

Home Depot shares closed on Monday at $340.96. So far this year, Home Depot shares are down about 2% compared with about 9% gains in the S&P 500 index.