Dive Brief:

• The Home Depot on Tuesday reported first quarter net sales fell 4.2% to $37.3 billion from a year ago, while comparable sales fell 4.5%. Net earnings slid 8.5% year over year to $3.9 billion versus $4.2 billion last year.
• CEO Ted Decker said sales for the quarter “were below our expectations primarily driven by lumber deflation and unfavorable weather." Decker described the retailer’s short-term outlook as “uncertain” but said the medium- to long-term outlook for the home improvement sector is “very positive.”
• In updated guidance, Home Depot said it now expects sales and comp sales to decline between 2% and 5% year over year, compared to its previous guidance of flat sales and comps. The company will also see an operating margin rate between 14% and 14.3% (compared to 14.5% previously projected), along with interest expenses of about $1.8 billion.

Dive Insight:

After a pandemic-era boom, consumer spending on home improvement has softened. 

“After a three-year period of unprecedented growth for our sector, during which we grew sales by over $47 billion, we expected that fiscal 2023 would be a year of moderation for the home improvement market,” Decker said in a statement. 

Lumber deflation and weather steered The Home Depot to one of the largest quarterly comps declines in over a decade, according to David Bellinger, executive director at Roth MKM. Home Depot’s operating margins declined about 30 basis points to 14.9% of sales in the first quarter. While earnings per share fell almost 7% to $3.82, that mark remains “a very respectable profitability measure given the sales softness,” Bellinger said.

Telsey Advisory Group analyst Joe Feldman said in a note ahead of the company’s Tuesday morning earnings call that Home Depot’s stock “is likely to remain in the penalty box until investors gain more confidence that the business has stabilized and there will not be further reductions to the guidance in this uncertain environment.”

Home Depot's CFO Richard McPhail said the consumer economy is in a transition period.

“Setting the short-term impacts of monetary policy aside, we know that the home improvement customer is healthy and we believe the medium to long-term underlying fundamentals of home improvement make it one of the most attractive markets in retail and the economy as a whole,” McPhail said during the earnings call.

McPhail also said the company’s Q1 performance reflects a $1 billion investment toward higher wages for frontline hourly associates, a move the company announced in February. Anne-Marie Campbell, the company’s executive vice president of U.S. stores and international operations, shared a more in-depth update on how the company’s investment in people has played out so far.

Campbell said March “saw the greatest year-over-year improvement in our attrition rate across all associate tenure cohorts that we’ve seen in some time.” The results of that shift include an improvement in key customer service metrics and operational benefits, like more consistent staffing and fewer safety incidents.

“These improvements are exactly what we set out to achieve with this wage investment,” Campbell said. “The consistency and talent of our workforce is an important foundation for driving both customer service and productivity.”

Campbell also told investors and analysts that the retailer has implemented changes to its order fulfillment processes to drive speed and efficiency when picking and staging customer orders.

Previously, they allocated hours based on overall order volume. But now hours are allocated based on the types of products being picked. That improves efficiency because, for example, it takes longer to pick and stage a patio set than it does a paintbrush.

Campbell also said Home Depot’s Sidekick app, which is powered by machine learning, has improved on-shelf availability for all SKUs, but “we’ve seen the most improvement in our high-velocity SKUs — or the products that are key drivers of our business. ... While this app is helping us to be more efficient with our tasking activity and improving our customer experience in the process, Sidekick is just getting started.”