And it’s not a good thing.
Home Depot (NYSE:HD) has been one of the most consistent stocks on the market over the years, beating earnings estimates over the past 19 quarters, or approximately five years.
That streak came to an end in the first quarter, as the home improvement retailer missed earnings estimates. However, it did surpass revenue projections.
In the first quarter, Home Depot saw net sales increase 9.4% year-over-year to $39.9 billion, surpassing estimates of $39.3 billion. Comparable store sales were down 0.3% overall, but up 0.2% in the U.S. Foreign exchange rates hurt total comparable sales by about 70 basis points. Also, Canada posted below average comparable store sales.
Net earnings were $3.43 billion in Q1, down 4.6% year-over-year, while earnings fell 55 to $3.45 per share. Adjusted earnings were $3.56 per share, down 3% from the same quarter a year ago. This fell short of analysts’ expectations, as they called for adjusted earnings of $3.60 per share.
Earnings were dragged down by higher costs, as operating expenses soared 13.2% to $8.3 billion. Operating expenses as a percentage of sales jumped roughly 70 basis points to 20.9% year-over-year, while the operating margin dropped to 12.9%, from 13.9% in Q1 of 2024. Also, interest and other expenses soared 38% to $591 million, due mainly to higher debt balances.
Further, the costs of goods sold rose 10% to $26.4 billion.
Consumers not doing larger projects
On the earnings call, analysts asked Home Depot leadership why sales didn’t accelerate, with more customers remodeling, given the high home prices.
Home Depot Chair, President and CEO Ted Decker said that it is due to a reduction in people taking on large projects.
“The large project generally requires some sort of financing,” Decker said on the call. “And while there are literally trillions of dollars of equity available to be tapped in the homes, I think there’s still enough macro uncertainty. And again, those stubbornly high interest rates that people are painting again and working in their yards and doing smaller projects but just have not engaged in the larger projects.”
Deckler believes that will change as consumer confidence grows.
“We’re very much looking forward to it to it as much as you are when people tap their equity gain the stronger macro confidence and engage in those bigger projects,” Decker said.
Eating the tariffs
In the meantime, the company plans to hold the line on prices and not raise them, despite the impact of tariffs.
Billy Bastik, executive vice president of merchandising at Home Depot, said over 50% of its purchases are inside the U.S. Also, he noted that the company has a diversified supply chain that is diversifying even further. Within the next 12 months, no country will represent more than 10% of its purchases.
“We intend to generally maintain pricing across our portfolio,” Bastik said. “We’ll continue to use the portfolio approach that we’ve talked a lot about in the past. But we don’t see broad based price increases for our customers at all going forward. It’s a great opportunity for us to take share and it’s a great opportunity for our suppliers to take share as well.”
When asked if Home Depot would have to subsidize what would have been price increases from somewhere else, Bastik said the company has “a number of different levers.” One would be productivity, another might be not carrying an item potentially impacted by a tariff.
Guidance calls for earnings decline in 2025
For the full fiscal year, Home Depot anticipates 1% growth in comparable store sales, and total sales growth of 2.8%. It also expects to open 13 new stores.
Earnings are projected to decline 3% in fiscal 2025 with adjusted earnings down 2%. The operating margin is targeted at 13%.
Home Depot stock was up in early trading, but by 2:00 p.m. ET, it was down about 1% on the day. Investors may have been initially hopeful about the pledge of no price increases, but after they digested the numbers, they may have been less bullish.
I’m not convinced its rosy outlook for the economy is justified, at least not yet, as there remains much uncertainty related to tariff impacts. Investors should be wary, especially since the stock is not cheap.
