Home Depot (HD) Stock: Retailer Cuts Profit Outlook as Housing Slump Weighs on Sales

TLDR

• Home Depot missed earnings estimates for the third consecutive quarter and cut its full-year profit forecast by lowering expected earnings per share decline from 2% to 5%.
• The company now expects full-year sales growth of about 3% with slightly positive comparable sales, revised from previous guidance of 2.8% sales growth and 1% comparable sales increase.
• Third-quarter earnings came in at $3.74 per share versus the expected $3.84, while revenue reached $41.35 billion against expectations of $41.11 billion.
• Consumer uncertainty and a weaker housing market have driven homeowners into a “deferral mindset” for large remodeling projects, with customer transactions falling 1.6% year over year.
• Lower-than-expected storm activity reduced demand for roofing materials and generators, while mortgage rates stuck between 6% and 7% have kept the housing market frozen.

Home Depot reported another earnings miss on Tuesday, marking the third straight quarter the retailer has fallen short of Wall Street expectations. The company posted adjusted earnings of $3.74 per share for the fiscal third quarter, missing the analyst consensus of $3.84.

The Home Depot, Inc., HD

Revenue reached $41.35 billion, slightly beating expectations of $41.11 billion. The stock dropped more than 3% in premarket trading following the announcement.

The retailer revised its full-year outlook downward. Home Depot now expects sales to climb about 3% with comparable sales slightly positive. This includes an estimated $2 billion in incremental revenue from GMS, a building products distributor acquired earlier this year.

The company expects full-year adjusted earnings per share to decline by about 5% from the prior year. This represents a downgrade from previous guidance calling for a 2% decline.

Chief Financial Officer Richard McPhail pointed to two key factors behind the disappointing results. Consumer uncertainty and housing market pressure have kept home improvement demand below expectations. The company also saw lower-than-usual storm activity during the quarter.

Housing Market Freeze Hits Demand

Mortgage rates have remained stuck between 6% and 7% in recent years. This has led to fewer people buying and selling homes. Housing turnover typically drives larger renovation projects as customers fix up properties before or after moving.

McPhail said the company anticipated demand would accelerate in the second half of the year as interest rates eased. That acceleration never materialized. Homeowners have been in a “deferral mindset” since roughly mid-2023.

Customer transactions fell 1.6% year over year in the third quarter. The average ticket amount rose 1.8%, but shoppers across income groups remain reluctant to take on high-dollar projects. About 90% of Home Depot’s do-it-yourself customers own their homes.

The lack of major storms and extreme weather events also hurt sales. Demand for roofing materials, backup generators and plywood typically spikes before and after seasonal storms. That didn’t happen last quarter.

Pro Business Expansion Continues

Home Depot has been working to attract more business from contractors and other professionals. The company made two major acquisitions to boost its pro segment. Last year, it bought Texas-based SRS Distribution for $18.25 billion. Earlier this year, it announced the purchase of GMS.

Online sales provided a bright spot, rising 11% year over year. McPhail described demand as “stable” from the second quarter to the third quarter when adjusting for the lack of hurricanes.

Net income for the quarter dropped to $3.60 billion, or $3.62 per share. This compared to $3.65 billion, or $3.67 per share, in the year-ago period. Revenue decreased from $40.22 billion in the prior year quarter.

McPhail told CNBC that other factors may be affecting consumer behavior. These include the prolonged government shutdown, an uptick in corporate layoff announcements and declining home values in some markets.

Tariff Impact Remains Limited

The company has faced higher costs on some imported items due to tariffs. Nearly half of Home Depot’s inventory comes from suppliers outside the United States. McPhail said the company has increased some prices, but described the increases as “modest.”

Home Depot has kept prices stable on some key items or reduced them. The retailer’s best-selling seven-and-a-half foot Grand Duchess Christmas tree and many strings of lights have dropped in price.

McPhail said it’s hard to identify near-term catalysts that would lead to demand acceleration. The company continues diversifying the countries where it sources goods. Home Depot shares are down about 8% year to date, trailing the S&P 500’s 13% gains during the same period.

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