Home Depot, the largest home improvement retailer in the United States, said Tuesday that its comparable-store sales declined 4.5% from a year earlier in its quarter ended April 30, worse than the 1.7% decline Wall Street analysts polled by Visible Alpha expected. This marks the second consecutive quarter of year-over-year declines, notable for a company that has not seen such on-year decreases since the Great Recession of 2007-09.

The retailer said sales fell below expectations primarily because of lumber deflation and unfavorable weather—including extreme weather events in California. Demand for big-ticket, discretionary items in high order during the pandemic—such as patio furniture, grills, and appliances—was weak. The company said consumers appear to be moving from large projects to smaller ones or breaking tasks into chunks.

Still, comparable-store sales rose for necessity-driven categories such as building materials, hardware, plumbing, and millwork. The one bright spot was Home Depot's ability to control what it can: Despite softening demand, the company has kept operating margins near 15%.

Indicators Mixed

Indicators for home-improvement spending look mixed. On the one hand, rising mortgage rates discourage households from selling or buying homes. Home values, which Home Depot said have the tightest correlation to home improvement spending, have shown early signs of weakening. According to the Census Bureau, the median price of homes sold declined 9% in the first three months of this year compared with the final quarter of 2022.

On the other hand, there is a chronic shortage of new housing stock, which means homes continue to age. Notably, 62% of homes were 32 years or older in 2021, up from 55% a decade earlier, according to the U.S. Census Bureau. Families may stay put in their homes, but their needs keep changing with new children or aging relatives, which creates a need for home improvement.

Home Depot Downgrades Guidance

Home Depot is seeing enough of a demand slowdown that it expects sales to decline between 2% and 5% this fiscal year, markedly worse than the flat guidance the company gave three months ago. Home Depot sees this year as a "transitional period" and says it is bullish on the medium to long-term outlook, pointing out that homeowners—their primary customer base—have seen home values skyrocket since 2019.

The question for investors is how long this transition might last and whether even slight declines in home values might erode consumer demand in the coming quarters. The foundations for solid home improvement demand are still there, but small cracks, some of which were on display last quarter, could still undermine it.

Key Points

  • Home Depot's sales decline is a sign that the housing boom that has fueled the company's growth in recent years is starting to cool.
  • Consumers are pulling back on spending amid concerns about the economy, including rising inflation, higher interest rates, and the war in Ukraine.
  • Home Depot still sees strong demand for some products and services, such as building materials and hardware.
  • The company is confident in its long-term prospects, but it is facing some challenges in the near term.

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