Home Depot Sends A Clear Consumer Health Warning

On Tuesday, The Home Depot Inc HD kicks off the retail reports ahead of Walmart WMT and Target TGT by posting its fiscal second-quarter earnings and sales that topped Wall Street estimates. However, in face of weak discretionary spending that diminished expectations of consumer sentiment recovering during the remainder of the year, Home Depot warned its annual profit is expected to decline, also expecting a bigger drop in its annual comparable sales. 

Fiscal Second Quarter Highlights

For the quarter ended on July 28th, Home Depot reported revenue rose slightly to $43.18 billion, topping LSEG’s estimate of $43.06 billion. Net income shrinked to $4.56 billion, or $4.60 per share. Comparable sales across the business dropped 3.3%, which was steeper than LSEG’s estimate of 1.98% and StreetAccount’s 2.1% estimate. In the U.S. alone, they dropped even more or 3.6% to be precise. This is Home Depot’s seventh consecutive quarter of negative comparable sales.

For the 13th straight quarter, Home Depot has been struggling with falling traffic that is reflected in declining customer transactions.

Full Year Guidance

Home Depot expects annual comparable sales to drop between 3% and 4% YoY compared with its prior view of a nearly 1% decline, while guiding for diluted profit per share drop between 2% and 4%.

Following the completion the deal for building materials supplier SRS Distribution in June, Home Depot total annual sales are in for a boost. This is part of the company’s plan to build its business for professional builders, roofers, landscapers and pool contractors, that make a half of its sales, to offset weak demand from DIY customers which make the other half of its business.

The SRS investment is expected to add about $6.4 billion to its full year sales. With this boost, revenue is expected to grow between 2.5% and 3.5% However, excluding sales from SRS, the new full-year forecast would actally be a revenue cut. 

Home Depot sent a consumer health warning, so all eyes are on Target and Walmart. 

Higher borrowing costs and steep inflation forced consumers to delay big home renovation projects. Chief Financial Officer Richard McPhail spoke of a more cautious consumer being the newest challenge. Investors will be watching closely at reports from Walmart and Target for further consumer health insights. Walmart is set to report its figures on Thursday, August 15th with Target to follow on August 21st. 

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