Home Depot is turning to the pros. Its timing is unusual.
The home improvement retailer on Tuesday said comparable-store sales in the U.S. declined 3.5% in the quarter ended Oct. 29 compared with a year earlier—slightly better than the 3.7% decline that Wall Street analysts polled by Visible Alpha were penciling in. That marks the fourth consecutive quarter of comparable-store declines after some heady growth during the pandemic years, when Americans suddenly found themselves more homebound than they ever have been. Net income fell 12%, which was better than the 15% decline analysts expected. Home Depot shares jumped 6.6% Tuesday morning.
Demand for necessity-based spending remains steady. Home Depot said that comparable sales for its building materials department grew compared with a year earlier. Other categories that performed better than the company average included plumbing, appliances and hardware. The year-over-year change in comparable sales from professional customers, such as contractors, was more favorable than that for regular consumers looking to do do-it-yourself projects.
Professionals account for about half of Home Depot's revenue, according to an estimate from UBS, and they are the retailer's current focus. The company said it is working on ways to increase its market share among pros—especially those working on complex, expensive projects—by adding features those contractors want. That includes the ability to reserve a product, use trade credits and have products delivered to the job site safely.
The timing is interesting. While high mortgage rates and low housing turnover haven't dented overall home improvement demand that much thanks to high home prices, lofty interest rates do seem to be affecting the most expensive renovation projects—those likely to require help. Chief Financial Officer Richard McPhail himself said on the call that the Fed's higher-for-longer interest rate stance could start having an "increasing impact for durable, housing-related spending," as consumers put off larger projects that require financing.
The National Association of Home Builders' remodeling market index for the third quarter showed that remodelers were the most pessimistic about the market for large remodeling projects that cost $50,000 or more. They remain relatively upbeat—though less so than last year—about the market for small projects under $20,000.
Home Depot's reasoning seems to be that, even in a weak environment for big renovation jobs, the professional market is fragmented enough that it can grab more share. The company sees about $200 billion worth of addressable market in that complex, big-ticket professional space.
Strong home prices still provide a solid underpinning. And despite the counterintuitive timing, there is a case to be made that professional demand should hold up well in the coming quarters given how necessity-driven it is. Home Depot's recent focus on exactly the segment that is weakening is a curious choice, but not one that'll dent its foundation.