Home Depot Sticks to Fiscal-Year Guidance. Why That’s a Relief for Investors.

Last month, world’s largest home-improvement retailer cut its guidance when it reported first-quarter earnings. The retailer pointed to softening consumer spending—a sentiment management reiterated on Tuesday, calling 2023 a year of “moderating demand.”

“We don’t quite know what the Fed’s posture will be, we don’t quite know what the follow up form the consumer will be,” said Chief Financial Officer Richard McPhail.

And while McPhail didn’t forecast how long this period of moderation would last, the company’s management team said it was possible for it to last into 2025—although that would be surprising, the company added. Indeed, the unchanged projections suggest things haven’t gotten worse in the past month or so. The company said there were some silver linings this year, including easing inflation, and has identified $500 million of cost saving initiatives that will be finalized in fiscal 2024.

“The outlook still calls for a difficult year,” wrote D.A. Davidson analyst Michael Baker in a note to clients. But, he added, the outlook also suggested that same-store sales declines “have bottomed.”

Unsurprisingly, the company was bullish about the prospect of the home improvement market in the long run.

“Once the home-improvement market returns to stability, we expect to see sales growth consistent with how our business has performed in the past,” said McPhail.

Home Depot
predicts annual sales growth of 3% to 4% for the broader home improvement market, and mid-to-high single digit growth in earnings per share. The company outlined three main factors driving the growth, including strong consumer balance sheets, home-price appreciation, and the fact that the U.S. housing stock is getting older.

“While the base case assumes share capture, we are not ruling out a case for even higher growth,” McPhail added.

Home Depot commands a roughly 17% share of the $950 billion home improvement market, management said Tuesday. The company is leaning heavily on its Pro business, which caters to contractors and other construction professionals, to capture some of that growth. Currently, 50% of its business comes from Pro customers.

Home Depot is tweaking its Pro loyalty program to give frequent customers preferred pricing on products, and is also building up existing tools, such as online ordering, dedicated sales teams for pros, and new supply chain investments.

Many of these capabilities are already available in Dallas, the company’s “test and learn market,” and have shown to be effective in driving growth. Dallas is the fastest-growing pro market, management said, and has seen spending on complex construction projects outperform other markets.

“The more comprehensive our relationship is with the pro the more they spend with us,” said Chip Devine, senior vice president of outside sales.

Home Depot also announced plans to open 80 stores in the next five years—including 13 stores in 2023—as well as the acquisition of Temco, an appliance delivery and logistics company. The acquisition was “not material” to the company’s enterprise, but it is material to the customer experience, said John Deaton, Home Depot’s executive vice president of supply chain and product development. The company didn’t disclose the financial terms of the deal.

Home Depot stock inched up 0.3% to $301.75 in early afternoon trading.

Write to Callum Keown at [email protected] and Sabrina Escobar at [email protected]