Dive Brief:
- The Home Depot on Tuesday reported second-quarter net sales rose 0.6% year over year to $43.2 billion. Overall comparable sales for the quarter fell 3.3% from last year and dipped further in the U.S., down 3.6%.
- Operating income fell 0.8% year over year to $6.53 billion from $6.59 billion. Net earnings for Q2 fell 2.1% from the year-ago period to $4.6 billion.
- Home Depot updated its full-year guidance. It now expects total sales to increase between 2.5% and 3.5%, compared to prior guidance projecting sales growth of 1%. Comp sales are expected to decline 3% to 4%, up from its previous forecast of a 1% decline. Gross margin for the year is expected to reach 33.5%, down from previous guidance of 33.9%.
Dive Insight:
As the broader home market remains challenged and uncertainty looms over consumers, CEO Ted Decker on a call with analysts said “a more cautious sales outlook is warranted for the year.” Decker also said high interest rates and other economic challenges pressured consumer demand during the quarter, resulting in weaker spending on home improvement projects.
The $18.25 billion acquisition of SRS Distribution, which was announced in March and completed in June, added $1.3 billion to the top line for Q2 and helped Home Depot end a period of falling sales that began over a year ago.
Wedbush analysts led by Seth Basham said in a note that while Home Depot’s Q2 results missed expectations on comps, they beat on margins and earnings per share. And while the company's updated guidance fell below Wedbush's expectations, the change is “reasonable – if not conservative,” Basham said.
And without SRS’s contribution to the quarter, Home Depot’s core sales fell 2.4%, “which is the same kind of weak performance it has been posting for a year,” Neil Saunders, managing director of GlobalData, said in emailed comments.
“Interest rate decisions matter more to Home Depot than they do to an average retailer, if only because a large chunk of home improvement demand is tied to the housing market. High interest rates have, and still are, acting as a brake on house moves,” Saunders said.
The challenges come as Home Depot faces a slight loss of market share as some DIY customers choose to shop around at other stores like Ace Hardware or paint retailer Sherwin Williams for their home improvement project needs.
“The one crumb of comfort here is that when rates do come down, it may lead to a small spike in home moving which will be helpful – but as is suggested by the guidance provided by Home Depot, the overall impact on annual sales will be somewhat muted because the cuts have come so late in the year,” Saunders said.
During Q2, Home Depot’s comparable average ticket fell 1.3%, while big-ticket comp transactions — which the company defines as those over $1,000 — fell 5.8% during the quarter, company leaders said on the call.
“We continued to see softer engagement in larger discretionary projects where customers typically use financing to fund the project, such as kitchen and bath remodels,” Billy Bastek, the company’s executive vice president of merchandising, said during the call.
Home Depot did see some bright spots in Q2 though. The company’s outdoor power equipment category drove positive unit and dollar comps for Q2 and plumbing also posted a positive comp.
Sales on digital platforms rose about 4% year over year. Nearly half of all online orders were fulfilled through stores. Building out its fulfillment options, Home Depot in June announced it was expanding its same-day delivery service with Instacart. “While we are still in the early days of our expanded partnership, we are encouraged with the results we are seeing,” Bastek said.
