Consumers are resilient, but 2023 could take a turn for the worse

Home Depot’s (HD) CEO Ted Decker isn’t yet ready to nail a bottom call onto the wallboard.

“Fears of a recession, or at least a severe recession, have largely subsided, and the consumer is generally healthy,” Decker told Wall Street analysts on a Tuesday earnings call. “But given all those positives … uncertainties remain.”

Decker hammered home a litany of concerns for investors to consider.

“We don’t know how quickly or further the share shift [from goods to services] in PCE will occur and where spending in home improvement, in particular, will ultimately settle,” Decker added. “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.”

In a sign of that caution, Home Depot reiterated its outlook for full-year sales to drop between 2% to 5% compared to fiscal 2022. Earnings 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

This led to a direct impact on the retail giant in the second quarter as consumers spent less on big-ticket items such as appliances.

Same-store sales for items priced over $1,000 tanked 5.5% from a year ago, Home Depot said.

“After three years of unprecedented demand in the home improvement market, we continue to see softer engagement in big-ticket discretionary categories like patio and appliances that likely reflects both pull-forward of these single item purchases and deferrals, called out Home Depot’s executive vice president Billy Bastek on the call.

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Consumer ‘incredibly resilient’

There were positives in the quarter, even if one needed a magnifying glass from aisle five to see them.

In the second quarter, merchandise inventories stood at $23.3 billion, down $2.8 billion year over year. Sales of smaller-ticket items held up relatively well. And same-store sales improved each month of the quarter, with a 0.4% drop in July.

“While that shift [in consumer spending] is happening, the overall economy and the consumer in particular have remained incredibly resilient. As we all know, the economy continues to grow with a number — another great GDP print for the second quarter,” Decker said.

To that end, retail sales out Tuesday backed up that sentiment as well, rising 0.7% in July from the previous month, in a positive surprise for Wall Street.

Now as the company looks to the second half of the year, it’s hoping seasonal items offer a clearer picture of consumer sentiment and a boost to sales.

Decker says he thinks sales stand to pick up as the weather becomes cooler in the fall, as recent data would suggest.

Analysts remain mixed at best though after the quarter and guidance.

“Home Depot’s 2Q was stronger than expected, however, its affirmation of sales guidance down 2%-5% for fiscal 2023 highlights the ongoing uncertainty around home improvement spending,” Fitch Ratings director Jonathan Reid said.

Home Depot shares traded flat for most of Tuesday’s session.

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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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