Home Depot (HD) earnings Q1 2023

Home Depot on Tuesday reported its biggest revenue miss in more than 20 years and lowered its forecast for this year, as consumers delay large projects and buy fewer big-ticket items like patio sets and grills.

The home improvement retailer said cold weather and falling lumber prices also hurt fiscal first-quarter sales. Its last quarterly miss of this magnitude was in November 2002.

The company’s shares were down about 1% in early trading.

Home Depot said it now expects sales and comparable sales to decline between 2% and 5% for the fiscal year. It had previously predicted roughly flat sales for the period. Its operating margin rate is also expected to come in lower for the year, in a range of between 14% and 14.3% compared with a previously expected 14.5%, including the effect of a $1 billion investment in employee wages.

Chief Financial Officer Richard McPhail told CNBC that Home Depot anticipated 2023 would be a year of moderation, after Americans’ huge appetite for home improvement during the Covid pandemic. The retailer’s annual sales have grown by about $47 billion from three years ago. Yet he said the expected pullback has been compounded by rising mortgage rates and a shift toward spending on services.

“The state of the homeowner is that they’re very healthy,” he said. “They have healthy balance sheets. They have healthy incomes. But I do think — and our professional customers tell us they hear this from their customers — there is that shift, even if it’s temporary from larger projects into smaller ones.”

Here’s what the retailer reported for the three-month period that ended April 30, compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

• Earnings per share: $3.82 vs. $3.80 expected
• Revenue: $37.26 billion vs. $38.28 billion expected

Home Depot reported fiscal first-quarter net income of $3.87 billion, or $3.82 per share, down 8.5% from $4.23 billion, or $4.09 per share, a year earlier. Revenue fell 4.2% to $37.26 billion from $38.91 billion.

It marked the second quarter in a row that Home Depot missed Wall Street’s revenue expectations. Last quarter, the company fell short of analysts’ expectations for the first time since November 2019, before the pandemic.

Comparable sales for the first quarter fell 4.5%, and dropped 4.6% in the U.S. McPhail said lumber deflation accounted for more than 2 percentage points of that decrease.

Sales trends were better among do-it-yourself customers than among home professionals, but sales fell year-over-year for both groups, CEO Ted Decker told investors on an earnings call.

Spring is the holiday season of the home improvement industry. It marks a major quarter for sales to do-it-yourself customers and professionals who typically seize upon the warmer and milder weather by gardening and taking on other projects.

Yet Home Depot and its competitors now face a more unpredictable outlook. Rising interest rates threaten to dampen the appetite of prospective homebuyers and cool home values. Groceries and essentials now take a bigger bite out of households’ budgets. And with Covid largely in the rearview mirror, Americans now weigh spending on travel, dining out and other experiences when they debate a kitchen renovation or a new refrigerator.

Customer transactions dropped nearly 5% in the quarter compared with the year-ago period, but the average ticket of $91.92 was roughly flat.

Prices of lumber have dropped, but inflation is still raising the price of other items, Decker said on the investor call.

This spring, colder and wetter conditions in California and the western U.S. contributed to lower-than-expected quarterly results, he said.

Home Depot in the quarter sold fewer pricier discretionary items, such as new appliances, McPhail said. He said customers may be putting off those purchases or may have already made them during the pandemic. Demand has softened for flooring, kitchen and bath items, too, he added.

Even so, McPhail said Home Depot has some factors that work in its favor. Housing supply in the U.S. remains low and is aging, dynamics that will continue to prop up home improvement demand. Sales grew year over year in some categories, including building materials, hardware, plumbing and millwork, reflecting that people are still investing in their homes, he said.

“Once we’re through this period, we think the medium to long-term fundamentals of home improvement are strong,” he said.

Shares of Home Depot closed Monday at $288.54, down about 17% from their 52-week high of $347.25. So far this year, the company’s stock has fallen nearly 9%. That trails the approximately 8% gain of the S&P 500 index and the 1% rise of the retail-focused XRT.

— CNBC’s Robert Hum contributed to this report.