Dive Brief:

• The Home Depot on Tuesday reported Q4 net sales rose 0.3% year over year to $35.8 billion. Lower lumber prices drove down company-wide comps, which were flat, by 70 basis points.

• Customer transactions fell 6% to 378.5 million, but average ticket value rose almost that much to $90.05, according to a company press release. Net income in the quarter rose 0.3% to $3.4 billion.

• The home improvement retailer said that, beginning in the first quarter, it will invest an additional $1 billion in annualized compensation for frontline, hourly associates.

Dive Insight:

The tight labor market and rising wages may be pushing Home Depot to boost its hourly pay, but they also are helping to keep its customers coming through its doors.

“We have good jobs, job growth, growing wages, still-strong balance sheets, and most of our customers tend to own their home, which has seen a significant increase in value,” CEO Ted Decker told analysts during a Tuesday morning conference call. “But as we've said, we do see a unique environment with many crosscurrents right now. Obviously there's heightened inflation and rising interest rates. A tight labor market and moderating equity in housing markets.”

The comp result and 13.3% operating margin, which both missed some analyst expectations, reflect “a tougher consumer spending environment and softer home improvement demand, driven by declining home sales and slowing remodeling activity,” Telsey Advisory Group analysts led by Joseph Feldman said in a Tuesday client note.

Nevertheless, executives said they expect to take market share, with the help of newly empowered associates. Along with the pay hike, the retailer has overhauled its store management program in an effort to improve both the customer service and employee experience and to simplify various systems, Ann-Marie Campbell, executive vice president of U.S. stores and international operations, said on the call.

The sector remains under pressure, however, according to CFO Richard McPhail.

“We've assumed like many economists that we will see flat real economic growth and consumer spending in 2023. Second, over the last seven quarters, we have seen our transactions gradually normalize as consumer spending has shifted from goods to services,” he said during the call. “We believe that if this shift continues at its current pace, the home improvement market would be down low-single digits.”

Home Depot released muted guidance for the year, anticipating sales and comp growth to be about flat to last year, with operating margin rate of about 14.5%, which reflects the $1 billion compensation investment, per the release.

“The cautious approach in this uncertain environment makes sense and could prove conservative,” Telsey’s Feldman said. “Overall, Home Depot should remain a winner in retail, given its best-in-class execution, digital prowess, and ongoing maintenance and repair activity.”