Shares of home improvement retailers Home Depot Inc. and Lowe’s Cos. fell on Tuesday, after Home Depot
HD,
cut its outlook on harsher weather and falling lumber prices. But some analysts said the pain might not be restricted to those chains alone.
That assessment arrives ahead of quarterly results from Target Corp.
TGT,
and TJX Cos. TJX
TJX,
on Wednesday and those from Walmart Inc.
WMT,
on Thursday. Those results will offer a clearer portrait of consumer demand, as a stalled housing market tries to find momentum and shoppers remain rattled by higher prices for things like groceries.
“The housing market boomed and then crashed and what is happening with Home Depot could be a warning of what will come to the broader retail space,” Edward Moya, senior market analyst at OANDA, said in emailed commentary on Tuesday.
Moya said that vacations have supplanted the DIY home-makeover projects that occupied homeowners’ time during the pandemic. Moya said that other major U.S. retailers could also end up dimming their financial forecasts.
“The bottom line is Home Depot is a good barometer that discretionary consumer spending is waning,” Louis Navellier, chief investment officer at Navellier Calculated Investing, said in a podcast.
U.S. retail sales crept 0.4% higher in April, below consensus estimates, with non-store retailers, general merchandise, and restaurants and bars leading the gains, BofA analysts said in a note on Tuesday. Sales for furniture, electronics, appliances and clothing fell for the third straight month.
Navellier noted that customer spending tended to accelerate in the spring and summer, but that spending on higher-priced items like appliances remains subdued. He said that Home Depot’s forecast yearly sales drop was its first since 2009.
Home Depot cut its full-year earnings-per-share outlook to a decline of between 7% and 13%, compared to an earlier forecast for a decrease in the mid-single digit percentage range. The chain also lowered its sales outlook to a decline of between 2% and 5%, which was worse than a prior outlook for approximately flat sales.
“Given the negative impact of the first quarter sales from the lumber and weather, further softening of demand relative to our expectations and continued uncertainty regarding consumer demand patterns, we are updating our guidance to reflect a range of potential outcomes,” Chief Financial Officer Richard McPhail said on Home Depot’s earnings call on Tuesday.
Lumber prices, which benefit Home Depot’s sales when they’re higher, swung wildly through the pandemic, as a homebuying and home-renovation boom that ran up against constraints at sawmills. That boom later went bust as interest rates rose and people began traveling and venturing back out into pre-pandemic life.
D.A. Davidson analysts said that now, the debate would be focused on whether Home Depot cut its earnings enough.
“Over the past three years during the pandemic, HD’s sales grew an average of 12.6% annually,” they said. “For the 10 years prior, the average sales growth rate was 5.2%. That suggests that HD may have over earned by $29B in sales over the past three years, or 18% of the $157B in sales in 2023. If that is right, it will take some time to unwind.”
Shares of Home Depot fell 1.4% on Tuesday. Lowe’s was down a little less than 1%.
Home Depot stock is down 3.9% over the past 12 months. By comparison, the S&P 500 Index
SPX,
is up 2.9% over that period.
