ATLANTA – Even as Home Depot forecast sales declines, the retailer had some optimistic news for investors and consumers on Tuesday.
“I think the most important observation we’ve made is that the worst of the inflationary environment is behind us,” Chief Financial Officer Richard McPhail said on an earnings call.
Shares of the home improvement giant rose nearly 6% in early trading after the company beat quarterly earnings expectations, helping drive a rally in the Dow Jones Industrial Average. Home Depot’s comments also came as federal data Tuesday morning showed inflation was flat in October compared to the prior month.
Home Depot kicked off a much-anticipated week of retail earnings reports from other household names like Walmart, Target and Macy’s. The retailers have all struggled as consumers become more selective in their spending, particularly on pricier, discretionary items, as they pay more for necessities like groceries.
Signs of Cooling Inflation
For multiple quarters, Home Depot customers have been buying fewer big ticket items and taking on smaller, less expensive projects.
Yet with its optimistic comments Tuesday, Home Depot indicated consumers and the broader economy could soon see relief. In the short term, cooling inflation reduces sales numbers for retailers, including Home Depot. But longer term, if prices level off or even start to drop, it can give shoppers more disposable income to spend elsewhere.
Plus, easing inflation could accelerate the end of interest rate hikes by the Federal Reserve. The central bank has been attempting to tame decades-high inflation without tipping the economy into recession.
Michael Baker, a retail analyst for D.A. Davidson, said relief likely won’t come soon enough to significantly impact holiday sales. He expects only modest growth for retailers this season.
“Less inflation can bring back some discretionary spending, but that’s offset by the fact it’s still a pretty soft spending environment overall,” Baker said.
At Home Depot, CFO McPhail described 2023 as “a year of moderation” after the home improvement boom during the pandemic. The company predicts a drop in sales versus last year.
Yet the normalization of other economic trends has brought stability for the business and customers, McPhail noted.
“Some prices are settling at levels higher than 2022, others are settling lower. But we’re seeing some stabilization happening,” he said.
Inventory and Pricing Trends
Appliances, which faced months-long wait times last year, are back in stock. Those healthier inventory levels have lifted appliance sales, said Billy Bastek, Home Depot’s head of merchandising.
Yet some drivers of inflation are beyond retailers’ control and also influence consumers’ spending decisions.
For example, CEO Ted Decker said cutting the price of paint doesn’t make a big dent in the overall cost of painting a room when you factor in labor costs. He said Home Depot remains focused on low prices but has pulled back on promotions that don’t move the needle for customers.
“Taking $10 off the price of paint doesn’t put a dent in the bigger cost – paying the painters,” Decker said.
Cautious Consumer Spending Heading Into Holidays
Even if inflation is showing signs of easing, analysts say consumers are still being cautious with spending heading into the critical holiday shopping season.
Target said last week it would offer holiday deals earlier this year and discount more items in order to clear excess inventory and attract selective shoppers.
Meanwhile, Walmart is increasing overnight stocking and expanding options for in-store pickup and delivery as it aims to fulfill orders quickly during the busy season.
And department stores like Macy’s and Kohl’s are working to highlight their most affordable offerings and value compared to other retailers.
Home Depot did not provide an outlook for holiday sales or promotions. But the company said it expects “a solid holiday season” as consumers take on household projects during their time off.
Still, analysts predict this year’s holiday sales growth will be modest compared to 2021 when shoppers were flush with stimulus money and eager to spend.
The National Retail Federation forecasts holiday sales rising between 6-8% this year, a slowdown from the 13% growth in 2021.
With shoppers more cost-conscious, retailers will need to find the right balance between discounts and profit margins during the all-important holiday season.