The parking lot at my local Home Depot (HD 0.79%) would seem to confirm the do-it-yourself center's first-quarter earnings results: It's always full of cars, and the aisles are crowded with customers (and you can never find an employee when you need one).
Although the retailer beat expectations with a strong report allowing it to raise guidance for the full year, this just might be as good as it gets for Home Depot. The impact of inflation is going to catch up to consumers, along with rising gas prices and interest rates, and in fact, it might have already begun.
A top-bar performance
The home center reported record sales of $38.9 billion for the period, up 3.8% over last year and ahead of Wall Street's forecast of $36.6 billion, as comparable-store sales rose 2.2%. Analysts had been looking for a 2.7% decline in comps as the macroeconomic factors were expected to take a toll on performance.
Home Depot's bottom-line result of $4.09 per share also easily surpassed projections of just $3.68 per share, and the home improvement center now anticipates full-year sales and comps growth of 3% each, with earnings per share to grow by mid-single-digit percentages (corporate event data provided by Wall Street Horizon).
Previously it had expected sales and comps to be only slightly positive while per-share profits were forecast to be in the low-single-digit range, and there's still good reason to think that is how it will ultimately play out.
Home Depot seems to have dodged the bullet of supply chain concerns and inflation impeding growth this quarter, but that might be changing.
The gathering storm
Spring is the biggest season for the home improvement industry as contractors are able to begin projects in earnest for the year, and contractors represent 45% of Home Depot's total sales, compared to just 20% to 25% at rival Lowe's (NYSE: LOW). As new residential construction was generally above the year-ago figure in the first quarter, it's not surprising that home centers were doing brisk business.
But builders are reporting dramatic slowdowns now. M/I Homes recently reported a 10% drop in new home deliveries and a 19% drop in new contracts. DR Horton said net sales orders were down 10%, while LGI Homes reported closings dropped 38%.
Lumber prices still remain exorbitant, even if they're down from the records hit last year, gas prices just hit a new all-time high of $4.47 per gallon on average, and the Federal Reserve raised interest rates a half percentage point recently, the largest increase in years. It has indicated a regular program of rate hikes is likely.
Even on the customer level, the effects are starting to show. Geolocation data analytics firm Placer.ai notes that while foot traffic to Home Depot and Lowe's started off strong in January and February compared to 2019, it turned negative in March and worsened considerably in April, especially for Lowe's.
There were heavy investments made by consumers in their homes during the first two years of the pandemic, driven in large part by the massive stimulus packages the government approved. But those are now starting to fade, even as the inflation they fueled begins to rage.
Especially the last $1.9 trillion package approved in March 2021 as the economy was beginning to regain balance is seen by many analysts as a particular reason for the current historic hikes in inflation.
The easy part is over
It means the good times might be over. Home Depot's quarterly report may be the high for some time to come. Housing is slowing as interests and costs continue to rise, supply chains remain snarled exacerbating pricing and availability problems, and consumers are pinched at the pump, in the grocery aisle, and everywhere they shop.
There is a chance these macro forces won't show up in Home Depot's results right away, but as consumer traffic in its stores starts to slow, the home improvement center's banner first-quarter performance may really be as good as it gets.