Business is decelerating at Home Depot (HD -0.67%). The home improvement center is forecasting profits in 2023 will fall compared to last year as consumers cut back on spending and it plans to increase the pay of its hourly workers by $1 billion.
Although CEO Ted Decker thinks the wage hikes will better competitively position the retailer, there is one number that investors really need to monitor to see just how bad things are going to get: inventory.
That figure keeps growing for Home Depot, and its continued expansion should be a worrisome warning sign.
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Nailing down the issue
This is a problem that has been building over the past year, but it began sounding an alarm last quarter when inventories rocketed 25% higher even as inflated prices could no longer mask the decline in comparable store sales, which rose a reported 4.3% at the time.
Now, even though the amount consumers paid at the cash register was up 5.8% from the year-ago period, customer transactions have tumbled 6%, or nearly double the rate of last year's fourth quarter. Comps were down 0.3%.
Transactions are now down 5.3% for the entire year, while average ticket prices are almost 9% higher. Inventory is up another 12.8% for the period. Because Home Depot doesn't really benefit from holiday shopping, this continued bloat shows just how much consumers are pulling back in the face of mounting costs.
With the Federal Reserve committed to aggressively raising interest rates this year, energy prices remain elevated. And with inflation still high, consumers are prioritizing buying essentials. Home Depot's professional contractors aren't faring much better as housing is in decline and a recession looks imminent.
Census Bureau data shows housing starts fell by 4.5% in January compared to December, a 21.4% plunge from a year ago.
Hemmed in by economic constraints
As problematic as this buildup is, Home Depot has massive scale and its overall results for the quarter show that while being a home improvement center is not the recession-proof business many thought, it has largely been resistant to the worst ravages of the retail downturn.
Fourth-quarter sales were up slightly to $35.8 billion from last year, but missed expectations of $36 billion. Earnings of $3.4 billion, or $3.30 per share, were better than the $3.28 per share Wall Street had been anticipating.
Decker pointed to the retailer's ability to "deliver growth on top of the $40 billion of sales growth achieved over the prior two-year period, while navigating persistent inflation, ongoing global supply chain disruptions, and a tight labor market, is a testament to investments we have made in the business."
Yet it's Home Depot's outlook for the future where the concerns become apparent -- it guided for mid-single-digit percentage declines in per-share earnings for the coming year. Sales and comps are also expected to be flat.
A widening retail concern
Home Depot's expectations are not that much different from Walmart's outlook, which also reported earnings and signaled it sees challenges ahead. The supermarket giant's CFO John David Rainey said: "While the supply chain issues have largely abated, prices are still high and there is considerable pressure on the consumer. Our guidance reflects a cautious outlook on the macro environment."
With slowing sales, fewer customers, and growing inventory issues that are now stretching back for more than a year, Home Depot is finding it has reached a ceiling in this market and investors ought to use caution for the foreseeable future.
