Profits outpace Home Depot. Why is the stock going down?

Home Depot (stock ticker: HD) reported earnings of $3.82 per share in the first three months of the year, just ahead of the $3.80 expected by analysts polled by FactSet. But quarterly sales of $37.8 billion were lower than estimates of $38.3 billion, which the company blamed on lower lumber prices and unfavorable weather.

Things got worse with financial forecasts. Home Depot now expects sales to decline between 2% and 5% from 2022, while it said in February that annual sales should be flat year-over-year. It also lowered its earnings-per-share forecast, saying it was likely to fall between 7% and 13% year-over-year, compared to a previous call for a decline in the average single digits.

“Given the negative impact to first-quarter sales from the lumber and weather contraction, further softer demand relative to our expectations, and continued uncertainty about consumer demand, we are updating our guidance to reflect a range of potential outcomes,” said Richard MacPhail, Chief Financial Officer of Home Depot.

Barron It was previously noted that lower prices for lumber, which rose during the pandemic, is likely to affect same-store sales. Still, the 4.5% decline in comparable sales was worse than the 1.6% decline analysts had expected. It marks the largest quarterly decline in more than a decade, reflecting lumber prices and lower demand.

The company’s decision to lower its 2023 financial forecast early in the year may have been wise, but it spooked investors who had hoped — too optimistically — that recent trends would show that consumers had simply put off home improvement projects during a wet and stormy period. spring. The most conservative view suggests that this does not happen.

“We think investors were bracing for a weaker Q1 read, but also signs of a reversal of trends in mid-May,” wrote MKM Roth analyst David Bellinger. “Our evidence this morning over the full year indicates that any acceleration in the second quarter so far has not been enough to instill confidence in the back half amid ‘widespread stress’ across the company.”

Shares in Home Depot, a component of the Dow Jones, fell 1.5% to $284.37 in early trading, while the market index fell 0.5%. Home Depot stock was down nearly 9% this year as of Monday’s close.

The weather has been a major complicating business for the home improvement industry, which was already grappling with a slowing economy and macroeconomic turmoil that is now made worse by unusually cold conditions. Warmer weather is stimulating both DIY and professional construction projects.

Weather has been a thorn in the side of similar companies, including Tractor Supply (TSCO) and Sherwin-Williams (SHW). Tractor Supply said the bad weather caused a 2 percentage point decline in comparable store sales. Its core business leans more toward agriculture — an area that relies more on weather than home improvement — but the company’s results are often a “good read” for companies like Home Depot and Lowe’s (LOW), said Raymond James analyst Bobby Griffin.

Lowe’s stock was down 1.9% in early trade. “We expect Lowe’s to see similar headwinds from the lumber contraction, as Home Depot, although with less exposure to the west, expects less headwinds from unfavorable weather on corporate sales,” said Jonathan Matuszewski, an analyst at Jefferies.

Aside from the weather, Home Depot may also face some challenges from the housing market, which has been in a bit of a slump over the past few quarters as higher interest and mortgage rates have dampened demand. like Barron It was reported that the spring home buying season, which is usually one of the busiest seasons, was slower than usual this year.

Home improvement retailers can still benefit when people are not in the market for a new home. Investors’ concern is that concern about a recession, along with the cost of financing big-ticket remodeling plans, has also discouraged people from undertaking renovation projects.

However, management is optimistic. “While the near-term environment is uncertain, we remain very positive about the mid- to long-term outlook for home improvement and our ability to grow our share of a large and fragmented market,” said Ted Dekker, Home Depot Chairman and CEO. .

Write to Jack Denton at jack.dento[email protected] and Sabrina Escobar at [email protected]