CEO says ‘uncertainties remain’ amid Fed rate hikes

Home Depot (HD) CEO fanned concerns on the economy after issuing a cautious outlook.

The home improvement retailer posted a slight earnings beat on Tuesday before the market open as consumers spent less on big-ticket discretionary items such as appliances. Overall, consumers seem less interested in home renovation than they once were with much higher interest rates.

“We were pleased in the second quarter, [but] uncertainties remain,” Home Depot CEO Ted Decker said on the earnings call. “We don’t know how quickly or further the share shift in PCE will occur and where spending in home improvement in particular will ultimately settle. And we don’t know how the monetary policy actions which are specifically intended to dampen consumer demand, what that impact will ultimately have on consumer sentiment in the overall economy.”

Two things are catching Wall Street’s attention in the early going.

First, Home Depot’s same-store sales fell 2% amid a pullback in shopper transactions. This is now the third straight quarter of declining same-store sales for the Georgia-based retailer.

And second, the retailer reiterated its full-year outlook despite a second quarter beat.

The company expects full-year sales to drop between 2% to 5% compared to fiscal 2022. And diluted earnings per share are expected to drop between 7% and 13% compared to last year.

The guidance comes as the Federal Reserve has raised its policy rate to a range of 5.25%-5.50%, the highest level since March 2001, in an effort to bring down inflation. Fed officials have left the door open to another increase this year, which could further hit consumers via borrowing costs and the housing market.

Read more: What the Fed rate hike means for bank accounts, CDs, loans, and credit cards

“With continued pressure in certain big-ticket, discretionary categories, Home Depot took the conservative approach [with guidance],” Evercore ISI analyst Greg Melich wrote in a client note.

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Home Depot shares rose nearly 2% in early trading.

The earnings rundown:

• Net sales: $42.92 billion vs. $42.12 billion expected

• Diluted EPS: $4.46 vs. $4.45 expected

• Same-store sales: -2.0% vs. -4.09% expected

• Customer transaction growth: -1.8% vs. -3.62% expected

• Average ticket growth: up 0.1% vs. up 0.56% expected

• Selling, general, and administrative expenses: $6.92 billion vs. $6.86 billion expected

What else we’re watching: Home spending and $15B share buyback program

Home improvement has been struggling to regain the allure it once had during the COVID-19 era when everyone was homebound.

“While there was strength in categories associated with smaller projects, we did see continued pressure in certain big-ticket, discretionary categories,” Home Depot’s Decker said in the earnings release.

Competitor Lowe’s (LOW), which is expected to report earnings next Tuesday, saw shares edge lower following Home Depot’s lackluster results and outlook.

Home Depot’s board of directors also approved a $15 billion share repurchase program, effective Aug. 15, in a bid to boost the stock price.

Wall Street’s first take

“The comparable sales decline this quarter comes in better-than-feared relative to Street expectations, which appears to have driven fixed cost expense leverage in excess of consensus models. Vendor commentary throughout the quarter highlighted Pro outperformance vs. Do-It-Yourself, which partially explains the outperformance. With this result, not surprised to see annual guidance reaffirmed.” —Jefferies analyst Jonathan Matuszewski

“Some might be disappointed by keeping the guidance unchanged despite the $0.20 beat on EPS and the better-than-expected comps. That said, with continued pressure in certain big-ticket, discretionary categories, HD took the conservative approach.” —Evercore ISI’s Greg Melich

“Home Depot put up a good quarter — same-store sales of -2% beat the Street’s estimate of -4.1% and came in slightly above market expectations of -2.5%, margins beat across the P&L, and FY23 guidance was maintained. In our view, the 2Q beat is confidence inspiring that full year guidance is tracking to at least the mid-point of the range, especially given easing same-store sales comparisons in 3Q and 4Q. We await more details on the 9AM ET conference call regarding 2Q monthly same-store sales cadence, August demand trends, DIY vs. Pro performance in light of management commentary regarding strength in smaller projects, and updated ticket vs. transaction outlook for the second half. We reiterate our Buy rating.” — Citi’s Steven Zaccone

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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].

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