Home Depot Braces For Slower Consumer Spending

The Home Depot's latest quarterly results aren't particularly worrisome -- its sales missed forecast by a bit, but profits did better than expected. The forecast for the coming year, however, is troubling observers. The Atlanta-based company predicts that sales will be flat in the coming fiscal year after three years of cashing in on the pandemic's DIY boom.

"Throughout most of fiscal 2022, we observed a resilient customer, who is less price-sensitive than we would have expected in the face of persistent inflation," said Ted Decker, chairman, president and chief executive office, in a conference call webcast for investors. However, sales began to slow in the third quarter, and more so in the fourth.

Decker said the retailer still sees "a healthy customer…our customers tend to own their home, which have seen a significant increase in value." The company says homes are now worth about 40% more than before the pandemic.



Still, "there's heightened inflation and rising interest rates, a tight labor market and moderating equity and housing markets," he said, leading the retailer to "expect moderation in home improvement demand."

Sales for the fiscal fourth quarter reached $35.8 billion, an increase of just 0.3% from the prior year's fourth quarter. And comparable sales ticked down 0.3%. Some of that is due to declining prices, with lumber down 50% from the year-ago quarter and a slowdown in big-ticket purchases. Sales in its Pro division outpaced consumer demand.

Net earnings were flat at $3.4 billion.

Seth Basham, an analyst who follows the company for Wedbush Securities, writes that Home Depot's results were "slightly below consensus on the top line and slightly above consensus on the bottom line."

But he predicts rough waters for all home-improvement retailers in the year ahead as the housing market continues to cool down.

Housing prices are expected to be flat or down 10%, compared to their peak last summer, with "at least a double-digit decline in existing home unit sales." That will likely drive a drop in home improvement and home furnishings sales. Basham predicts sales declines for Home Depot and Lowe's in the low-to-mid single digits.

Home Depot also announced it would direct $1 billion into the hourly wages of its U.S. and Canadian sales associates to become more competitive in recruiting and retaining talent.

That encouraged some analysts, given the damages labor shortages are causing throughout the retail sector.

"We contend such investment is imperative to elevate the customer and employee experience," writes Jaimie Katz, an analyst who follows Home Depot for Morningstar. Employee raises support the brand's value, and "with an updated store team structure, new career paths that provide pay upside could help retain employees, allowing for continuity of knowledge at the store level."

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