Home Depot beat earnings expectations in the third quarter but flagged continued pressure on big-ticket items as sales fell 3%.
The home-improvement company narrowed full-year guidance, and all but confirmed its first annual sales drop since 2009. However, the stock climbed 1.9% in premarket trading.
That's partly because earnings beat estimates. Home Depot reported earnings of $3.81 a share, beating estimates of $3.75. Sales fell 3% year over year to $37.7 billion but narrowly beat analysts' expectations of $37.6 billion, according to FactSet.
CEO Ted Decker said that while consumers were still committing to smaller projects, Home Depot (ticker: HD) continued to see pressure in certain big-ticket, discretionary categories. The company narrowed its full-year guidance, saying it now expects sales and comparable sales to decline between 3% and 4% compared to its previous 2% to 5% range. Analysts currently see a 2.9% drop.
Home Depot now expects earnings per share falling between 9% and 11%, from a previous range of 7% to 13%. Analysts polled by FactSet see a 9.4% decline.
While it's not a guidance hike, it does lower the worst-case scenario end of the range. In the current climate, with investors nervous over the strength of consumer spending in the months ahead, that's likely being seen as a positive.
Home Depot is about to step up to the earnings plate. A tough economic backdrop is going to make it tough for the home improvement company to knock it out of the park.
It hasn't been an easy time for retailers focused on home improvement. With the housing market at its most unaffordable since the 1980s and mortgage rates pushing 23-year highs, people haven't been too keen on buying new homes—or embarking on the renovations that tend to accompany a new purchase. Higher interest rates have also dissuaded current homeowners from taking on remodeling projects.
That has translated to fewer sales for companies such as Home Depot (ticker: HD) and rival Lowe's (LOW). While both companies beat expectations in the second quarter, Home Depot's sales fell 2% from a year ago, while Lowe's fell 9%.
Third-quarter earnings won't be much different and are "unlikely to ease market misgivings," wrote BofA analyst Elizabeth Suzuki in a note to clients last week.
Wall Street is predicting that Home Depot's sales, due Tuesday morning, will fall 3% year over year to $37.6 billion, according to FactSet. Earnings per share are expected to clock in at $3.75, down from $4.24 in the year-ago quarter.
"Home improvement and furniture remain in a cyclical downturn as trends soften with broad uncertainty of when demand will bottom," wrote TD Cowen analyst Max Rakhlenko in a note to clients, adding that he says the industry could remain under pressure into fiscal 2024.
That said, Home Depot is better positioned than its peers to navigate the macro environment, Rakhlenko wrote. The company has a bigger contractor business, which could help insulate it from a slowdown in demand from do-it-yourself clients. Rakhlenko will be listening closely during the company's analyst call, scheduled for 9 a.m., for further commentary on professional contractor demand, as well as any updates on fiscal year guidance.
Rakhlenko and Suzuki both have Buy ratings on Home Depot stock and are bullish on the company's long-term prospects. Half of the analysts covering the stock have Buy ratings, while 42% rate it a Hold and 8% rate it a Sell.
Home Depot stock is down 8% year to date. The S&P 500 is up 15%.