Home Depot stock drops as bad weather and lumber deflation hurt sales and profit outlook
By Tomi Kilgore
Home Depot sees further softening of demand, leading to lowered outlook for profit, sales and operating margin
Shares of Home Depot Inc. dropped Tuesday, after the home improvement retail giant reported fiscal first-quarter profit that topped expectations but sales that fell short, and it cut the full-year outlook, citing lumber deflation and bad weather.
Net income for the quarter to April 30 fell to $3.87 billion, or $3.82 a share, from $4.32 billion, or $4.09 a share, in the same period a year ago. That topped the FactSet consensus for earnings per share of $3.80.
Sales declined 4.2% to $37.26 billion, well below the FactSet consensus of $38.31 billion.
"Our sales for the quarter were below our expectations primarily driven by lumber deflation and unfavorable weather, particularly in our Western division as extreme weather in California disproportionately impacted our results," said Chief Executive Officer Ted Decker.
Overall comparable-store sales fell 4.5% to miss the FactSet consensus for a 1.6% decline, with same-store sales in the U.S. falling 4.6%. (Comparable-store sale typically refers to sales of stores that have been open at least a year.)
"While there was relative strength in project-related categories, like building materials, plumbing and hardware, we had many departments with negative [comparable sales] in the quarter and continue to see pressure in a number of big-ticket discretionary categories," said Decker on the post-earnings conference call with analysts, according to a FactSet transcript.
The stock sank 1.8% in morning trading, but pared earlier losses of as much as 4.0%. The stock's $5.10 price decline was reducing the Dow Jones Industrial Average's price by about 34 points, while the Dow dropped 231 points, or 0.7%.
Customer transactions fell 4.8% to 390.9 million and the average ticket per transaction inched up 0.2% to $91.92. That compares with a 6.0% drop in customer transactions to 378.5 million in the fiscal fourth quarter, and an average ticket increase of 5.8% to $90.05.
"Given the negative impact to first quarter sales from lumber deflation and weather, further softening of demand relative to our expectations, and continued uncertainty regarding consumer demand, we are updating our guidance to reflect a range of potential outcomes," said Chief Financial Officer Richard McPhail.
For fiscal 2023, the company cut its EPS guidance to a decline of between 7% and 13% from a decline in the mid-single digit percentage range, and lowered its sales outlook to a decline of between 2% and 5% from approximately flat.
That would mark the first year-over-year decline in sales and EPS since fiscal 2009.
"The debate will be on if [Home Depot] cut estimates enough," wrote D.A. Davidson analyst Michael Baker in a note to clients.
He noted that over the past three years during the pandemic, sales grew by an average of 12.6% a year, more than double the 5.2% average growth in the 10 years prepandemic. That suggests Home Depot may have "over earned" by $29 billion in sales over the past three years.
"If that is right, it will take some time to unwind," Baker wrote.
He reiterated his neutral rating on the stock, and his $306 price target.
Meanwhile, Wells Fargo's Zachary Fadem said investor sentiment toward Home Depot's stock (HD) was already weak, but it's "unclear" if the full-year guidance cut "reflects conservatism or the start of something worse."
Fadem kept his rating at overweight and stock price target at $350, as the guidance could "ultimately prove a clearing event should HD properly message that numbers are low enough."
The stock has traded down 11.8% over the past three months, while shares of rival Lowe's Companies Inc. (LOW) have declined 7.9% and the Dow has slipped 1.7%.