Home Depot sees a declining home-improvement market if consumer demand keeps shifting to services from goods

Home Depot Inc. said Tuesday the home-improvement market could weaken this year, if consumer spending keeps shifting toward services from goods, and if inflation continues to affect demand.

The home-improvement giant HD,
-0.33%
expects fiscal 2023 net sales and same-store sales to be about flat with last year, however, because it will take market share from its competitors.

Sales could be hurt further if lumber prices, which have already fallen by more than 50% from a year ago, continue to decline.

The average analyst estimate compiled by FactSet for sales at the time Home Depot reported results was $158 billion, which implied 0.4% growth, while the FactSet consensus for same-store sales was for a rise of 0.2%.

Chief Financial Officer Richard McPhail said on the post-earnings conference call with analysts that for about the first five quarters postpandemic, the company saw significant growth in the value of the average ticket and number of transactions, because homeowners took on more do-it- yourself projects as they spent more time at home.

Since about the second fiscal quarter of 2021, McPhail said sales continued to rise due to ticket growth, but the number of transactions “steadily normalized” toward prepandemic levels, “as the broader consumer economy shifted” from goods back to services.

“We believe that if this shift continues at its current pace, the home-improvement market will be down in low-single-digits [percentages],” McPhail said, according to a transcript provided by AlphaSense.

Meanwhile, earnings per share for the year are forecast to decline in the “mid-single-digit” percentage range, as a higher expected tax rate and an investment in employee compensation weighs on operating margins.

That was a surprise for Wall Street analysts, as the FactSet EPS consensus for the current fiscal year was $16.70, which was a penny more than EPS for last year.

Home Depot’s stock dropped 7.1% to $295.50 on Tuesday, enough to make it the worst performer among the Dow Jones Industrial Average’s DJIA,
+1.06%
components. The stock’s $22.45 price decline cut about 148 points off the Dow’s price, while the Dow fell 697.10 points, or 2.1%.

The company also reported before the open fiscal fourth-quarter EPS that topped expectations, net sales that came up a bit shy and same-store sales that surprisingly declined.

Chief Executive Officer Ted Decker said on the post-earnings call with analysts that through most of fiscal 2022, the company’s “resilient” customers were less price sensitive than expected in the fact of persistent inflation.

“In the third quarter, we noted some deceleration in certain products and categories which were more pronounced in the fourth quarter,” Decker said, according to an AlphaSense transcript. “This, along with the negative impact from lumber deflation, led to fourth-quarter comps [same-store sales] that were slightly softer than anticipated.”

Home Depot’s stock has slumped 9.0% over the past three months and decreased 6.5% over the past 12 months, while the Dow has eased 2.8% the past three months and slipped 1.4% the past year.