Home Depot Cuts Earnings Outlook Amid Slowing Home Improvement Demand

Home Depot has once again fallen short of Wall Street expectations, marking its third consecutive earnings miss. On Tuesday, the retail giant slashed its full-year profit forecast, citing weak consumer spending and a sluggish housing market that has resulted in lower-than-expected demand for home improvement products.

The company reported third-quarter earnings below analysts’ projections, and its stock dropped more than 3% in premarket trading in response to the news. Home Depot’s updated outlook reflects broader concerns in the home improvement sector, as rising mortgage rates continue to dampen both housing turnover and consumer spending on home upgrades.

Weaker Demand and Economic Pressures

Home Depot’s revised guidance for the year now expects full-year sales to grow by 3%, a slight increase from its previous estimate of 2.8%. However, the company’s comparable sales, which measure growth at existing stores, are forecasted to be only slightly positive—down from an earlier projection of 1% growth.

Chief Financial Officer Richard McPhail pointed to ongoing economic pressures as a key factor behind the company’s struggles. “When we set guidance, we had anticipated that demand would gradually improve in the latter half of the year, as interest rates and mortgage rates eased,” McPhail said in a CNBC interview. “But consumer uncertainty and continued challenges in housing are disproportionately impacting demand for home improvement products.”

While Home Depot’s revenue for the quarter came in slightly above Wall Street’s expectations, the company reported adjusted earnings per share (EPS) of $3.74, falling short of the projected $3.84. Revenue for the quarter reached $41.35 billion, exceeding the forecast of $41.11 billion, but still reflecting weaker-than-expected performance.

The Impact of Mortgage Rates and Consumer Sentiment

The ongoing downturn in the housing market has led many homeowners to delay larger home improvement projects. With mortgage rates remaining high, borrowing costs have risen sharply, discouraging consumers from undertaking expensive renovations. According to McPhail, Home Depot’s customers have been in a “deferral mindset” for much of 2023, postponing major purchases like roofing materials and home improvement tools.

In a typical year, the home improvement industry benefits from seasonal storm activity and home turnover—events that often prompt homeowners to undertake remodeling projects. However, the lack of significant storm activity this year, combined with consumer reluctance, has left Home Depot with a gap in expected demand.

Despite these challenges, online sales were a bright spot for Home Depot, increasing by 11% year-over-year. The company’s ability to maintain a strong digital presence helped offset some of the declines seen in its in-store transactions.

Financial Results and Future Outlook

For the fiscal third quarter ending November 2, Home Depot reported a net income of $3.60 billion, or $3.62 per share, compared to $3.65 billion, or $3.67 per share, in the same period last year. Revenue dropped slightly from $40.22 billion a year earlier.

While the average amount spent per transaction—referred to as the average ticket—rose by 1.8%, the company saw a 1.6% decline in customer transactions. This reflects a broader trend of customers opting for fewer purchases or deferring their home improvement plans until economic conditions improve.

Strategic Adjustments and Acquisitions

In response to the slowing demand, Home Depot has shifted its focus toward attracting more business from professional contractors, roofers, and other industry specialists. The company has made two key acquisitions to bolster its position in this segment. Last year, Home Depot purchased SRS Distribution, a supplier of building materials for professionals, for $18.25 billion. Earlier this year, it also acquired GMS, a distributor of building products.

These acquisitions are intended to strengthen Home Depot’s position as a one-stop shop for both DIY consumers and professional contractors, a strategy that has become increasingly important as the retail landscape shifts.

The Broader Retail Environment

Home Depot is not alone in facing these challenges. Like many other retailers, the company is feeling the pressure of higher costs due to tariffs on imported goods. Although Home Depot has made efforts to diversify its supply chain, the company has warned that some price hikes may still be necessary to offset rising import costs.

Despite these difficulties, McPhail pointed out that the company is working hard to maintain competitive pricing on key items. For instance, the price of Home Depot’s popular Grand Duchess Christmas tree and certain holiday decorations have even been reduced this year.

Conclusion: Navigating a Slower Economy

As Home Depot navigates a challenging retail environment, the company faces ongoing uncertainties in both the housing market and consumer behavior. While its pro-business acquisitions and continued focus on online sales provide some optimism, the company is in a holding pattern, waiting for economic conditions to improve before it can expect a meaningful recovery in home improvement demand.

With interest rates likely to remain high for the foreseeable future, Home Depot’s ability to adapt to shifting consumer priorities will be crucial in determining how it performs in the coming quarters.