Home Depot cuts earnings outlook as home improvement demand falls short of expectations

Home Depot on Tuesday cut its full-year profit forecast and missed Wall Street's earnings expectations for the third straight quarter as it saw weaker home improvement demand, tepid consumer spending and lower than usual storm activity.

The retailer said it now expects full-year sales will climb about 3% and comparable sales, which take out the impact of one-time factors like store openings and calendar differences, to be slightly positive. That compares to its previous expectations for full-year sales to grow by 2.8% and comparable sales to increase by 1%.

The revised outlook includes an estimated $2 billion in incremental revenue from GMS, a building-products distributor that Home Depot acquired earlier this year. The company's sales were not part of its previous full-year guidance.

Home Depot expects full-year adjusted earnings per share to decline by about 5% from the year-ago period, compared to its prior expectations that they would fall by about 2%

In a CNBC interview, Chief Financial Officer Richard McPhail said the retailer previously expected home improvement activity would increase. It also anticipated higher sales of roofing materials, generators and other supplies that typically sell before and after seasonal storms.

Neither dynamic materialized, he said, putting pressure on the business. 

"When we set guidance, we had anticipated that demand would begin to accelerate gradually in the back half of the year as interest rates and mortgage rates eased," he said. "But what we saw was that ongoing consumer uncertainty and continued pressure in housing are disproportionately impacting home improvement demand."

Here's what Home Depot reported for the fiscal third quarter compared with Wall Street's estimates, according to a survey of analysts by LSEG:

As of Monday's close, Home Depot's shares are down about 8% so far this year. That trails the S&P 500's 13% gains during the same period.

For Home Depot, housing turnover typically sparks larger and more lucrative projects as customers fix up their homes before or after moving. Those big projects, however, have dropped in frequency as higher interest rates have led to steeper mortgage rates and borrowing costs for loans, which a homeowner may use to pay for a kitchen remodel or major addition.

Since roughly the middle of 2023, McPhail has told CNBC that homeowners have been in a "deferral mindset." That's led to a bit of a waiting game for Home Depot, as it awaits either lower mortgage rates or a shift by consumers who get used to higher mortgage rates as the new normal.

In the most recent three-month period, that waiting game continued. McPhail told CNBC that demand was "stable" from the fiscal second quarter to the third quarter when adjusting for the lack of hurricanes. 

But, he added, "at this point, it's hard to identify near-term catalysts that would lead to acceleration." 

Home Depot's net income for the three-month period that ended Nov. 2 dropped to $3.60 billion, or $3.62 per share, from $3.65 billion, or $3.67 per share, in the year-ago quarter. Revenue decreased from $40.22 billion in the year-ago quarter.

Average ticket, the typical amount spent by customers at the store or on the company's website, rose 1.8% year over year in the quarter. However, customer transactions fell 1.6% year over year.

A bright spot in the quarter was online sales, which rose by 11% year over year, McPhail said.

Compared to other big-box retailers, Home Depot's customers tend to be more financially stable. About 90% of its do-it-yourself customers own their homes and the home professionals who shop at the retailer tend to get hired by homeowners.

Even so, McPhail said Home Depot's weaker outlook came in part because shoppers across income groups are reluctant to take on high-dollar projects. He said a slower housing market and the higher cost of borrowing has contributed to the trend.

He said other factors may also be having a chilling effect, including the prolonged government shutdown, an uptick in corporate layoff announcements and a decline in home values in some markets.

As do-it-yourself customers postpone bigger projects, the company has tried to attract more business from contractors, roofers and other professionals.

The company has made two key purchases of pro-related companies. Last year, it bought Texas-based SRS Distribution for $18.25 billion — the largest acquisition in its history. The company sells supplies to professionals in the landscaping, pool and roofing businesses. Earlier this year, Home Depot announced it was buying GMS.

Like other retailers, Home Depot has felt the pinch of higher costs on some imported items because of tariffs. McPhail said in May that the company was diversifying the countries where it sourced its goods and intended to "generally maintain our current pricing levels across our portfolio."

However, company leaders warned in August that it may have to hike prices in some categories because of higher tariffs.

McPhail told CNBC that Home Depot has increased some items' prices, but said "where there were price actions, they were modest." 

He said Home Depot has kept prices the same for some key items or even been able to reduce them. For example, he said, its best-selling seven-and-a-half foot Grand Duchess Christmas tree and many of its strings of lights for trees have dropped in price.