Home Depot warned that consumer sentiment on the economy is souring as it slashed its sales forecast for the second half of the year.
The big box home improvement chain on Tuesday blamed high interest rates and fears of a possible downturn in the economy for disappointing second-quarter earnings.
Richard McPhail, Home Depot’s chief financial officer, told CNBC on Tuesday that consumers have adopted a “deferral mindset” since the middle of last year, resulting in lower spending on home-improvement projects.
“Pros tell us that, for the first time, their customers aren’t just deferring because of higher financing costs,” he said.
“They’re deferring because of a sense of greater uncertainty in the economy.”
A recent survey of 2,000 Americans found that three in five believe the US is currently in a recession despite the fact that government data show the economy is growing.
The Labor Department’s most recent jobs figures from July showed a slowdown in hiring — raising alarms that a recession could be in the offing.
Uncertainty over the economy and concerns about the labor market prompted a stock market meltdown last week, though the Dow Jones and Nasdaq indexes recovered from the losses.
Shares of the Atlanta-based retailer were down by as much as 5% in pre-market trading before rebounding closer to the opening bell on Tuesday after the company said it expects between 3% and 4% less sales this year compared to last year.
Home Depot, which is considered a bellwether that points to consumer behavior and economic trends, released its latest earnings report on Tuesday, showing a bigger drop in comparable sales than expected for the second quarter.
“During the quarter, higher interest rates and greater macroeconomic uncertainty pressured consumer demand more broadly, resulting in weaker spend,” CEO Ted Decker said.
Customers delayed big-scale projects such as flooring, kitchen cabinets and bath to tackle steep inflation, even as higher mortgage rates and home prices hurt new homes sales.
Weak new home sales in May and June led to foot traffic dropping 0.4% in July after a 4.3% rise in June, according to data from Placer.ai.
Home Depot expects annual comparable sales to drop between 3% and 4%, compared with its prior view of a nearly 1% decline.
Comparable sales in the second quarter fell 3.3%, steeper than expectations of a 1.98% decline, according to LSEG data, while customer transactions fell 1.8%, its 13th straight quarter of drop.
Home Depot’s balance sheet has been trending downward since the height of the coronavirus pandemic.
In 2020, the company reported approximately $132.1 billion in revenue — up 20% from $110.2 billion from the year prior.
The next year, Home Depot reported revenue of $151.2 billion and $157.4 billion in 2022 as pandemic-era spending continued apace.
Last year, Home Depot generated $157.7 billion in revenue — a marginal increase from 2022. The slowdown in spending on home improvement coincided with consumers preferring travel and concert tickets.
Home Depot’s bottom line also fell victim to soaring inflation and sky-high interest rates that have limited discretionary spending and increased the cost of borrowing more money.
Despite the slump, Decker said he was still optimistic.
“The underlying long-term fundamentals supporting home improvement demand are strong,” the CEO told analysts.
Good news could be on the horizon for the housing market, which has been plagued by chronically high demand and low inventory.
Mortgage rates fell to their lowest level in more than a year last week.
The average rate on a 30-year fixed-rate loan fell to 6.47% — down from 6.73% the previous week, according to a survey conducted by mortgage broker Freddie Mac.
At this time last year, the average 30-year rate stood at 6.96%.
With Post wires
