The American home improvement giant, Home Depot (NYSE: HD), is experiencing a substantial slowdown, mirroring a trend across many major U.S. retailers, particularly those in the home goods sector. The Atlanta-based company recently released its third-quarter earnings report for 2024, which revealed a 1.2% year-over-year decrease in comparable U.S. store sales. The term “comparable sales” specifically measures revenue from stores open for at least a year, offering an insightful snapshot of current business performance in relation to previous years.
The latest data provides insight into why consumers are reducing discretionary spending and becoming increasingly cautious. During an earnings call, Home Depot executives shed light on factors beyond inflation that are contributing to lower spending levels, including political and economic uncertainty, rising mortgage rates, and an upcoming shift in home buying habits.
The third-quarter results reflect broader economic pressures that are impacting spending decisions for a growing number of American consumers. Notably, Home Depot’s average transaction size dropped by almost 1%, underscoring a trend in consumer conservatism that spans beyond store foot traffic. Lower transaction values, particularly on big-ticket items, reveal that consumers are reevaluating where to place their money, prioritizing essential needs over major investments.
More significantly, customers are delaying or entirely avoiding large, discretionary home improvement projects, including big-ticket renovations like kitchen and bathroom remodels. These projects have traditionally been a substantial driver of Home Depot’s revenue, which is why their decline signals a serious challenge for the company.
The cautious behavior observed in Home Depot’s customer base translated into a roughly 4% year-over-year decrease in net earnings for the quarter. Despite recent efforts to boost sales, including promotional campaigns and expanding product lines, the effects of a weakened macroeconomic environment have proven difficult to counterbalance.
Home Depot’s Chief Financial Officer, Richard McPhail, noted during the earnings call that while inflation has been a concern, the company’s surveys indicate that inflation alone is not deterring customers. According to McPhail, other factors, including economic and political uncertainty, are causing a significant drag on consumer confidence and spending.
“The number one issue that people were citing in our surveys were general macroeconomic and even political uncertainty,” McPhail explained, adding that this uncertainty dampens consumer enthusiasm for major investments.
High Mortgage Rates: The 30-year mortgage rate in the U.S. remains above 6%, a level not seen consistently in years. Higher mortgage rates reduce home turnover rates and make buying new homes less appealing, meaning fewer consumers are engaging in the remodeling projects that often accompany new home purchases.
Low Housing Turnover: Current data reveals that the housing turnover rate has dropped to 2.5%, its lowest in three decades. This decline in home sales translates to fewer new homeowners looking to customize or upgrade properties, a factor that directly impacts sales for Home Depot and its competitors in the home improvement space.
Election-Induced Uncertainty: The 2024 presidential election cycle also appears to have contributed to a sense of unease among consumers. With former President Donald Trump securing a return to office, his victory over Democratic candidate and Vice President Kamala Harris marked a politically charged environment that may be causing Americans to think twice about discretionary spending until a clearer picture of the economic direction becomes apparent.
Richard McPhail discussed the impact of low consumer confidence on large-scale home improvement projects during the earnings call. According to McPhail, the decision to proceed with a substantial renovation project, such as a new kitchen or bathroom, often depends on consumers’ belief in a stable economic and political future.
“For someone to make that decision to pull the trigger on a $25,000, $50,000, $75,000 project, there’s a certain amount of confidence that goes into that,” he stated. “And, one would hope that we’re headed toward a change in overall confidence levels.”
In the context of decreased consumer confidence, Home Depot faces an uphill battle in convincing consumers to commit to costly renovations. For many, discretionary projects are a secondary concern that remains on hold as families prioritize financial security.
Notably, Home Depot did see a temporary boost in sales related to natural disasters during the third quarter. Hurricanes Helene and Milton, which both struck the U.S. Southeast in recent months, prompted consumers to make emergency purchases to prepare and recover from the storms’ impacts.
The destruction caused by Hurricane Helene in September, which affected Florida, Georgia, and the Carolinas, and Hurricane Milton in October, which devastated parts of Florida, led to increased spending on items like plywood, tarps, and generators. This contributed roughly $200 million in sales for Home Depot during the quarter. Although beneficial, this increase reflects a short-lived uptick rather than a sustained trend in consumer behavior.
In response to its lackluster third-quarter performance, Home Depot has updated its projections for the remainder of the 2024 fiscal year. Although the company anticipates a 4% increase in total sales for the year, it has downgraded its outlook for comparable sales, now predicting a decline of around 2.5%. This revision reflects ongoing economic challenges that are expected to continue influencing consumer behavior in the home improvement sector.
Ted Decker, CEO of Home Depot, remained cautiously optimistic, noting that the company is focused on enhancing its online and in-store experiences, catering to professional contractors (known as “Pro” customers), and opening new stores to capture a broader market share.
“Despite the continued uncertainty in the macroeconomic environment, our focus remains on creating the best interconnected experience, growing Pro wallet share through a differentiated set of capabilities in building new stores,” Decker stated.
In the face of these challenges, Home Depot is adopting strategies to adapt to the changing market environment. One of its key efforts involves building stronger connections with professional contractors, who are typically less affected by seasonal fluctuations than individual consumers. Home Depot has tailored a suite of specialized products and services to meet the needs of this critical customer segment, helping them tackle projects efficiently and cost-effectively.
Moreover, the retailer is increasing its emphasis on e-commerce to meet the demands of digital-savvy customers who seek convenience in their shopping experiences. Expanding its digital and physical footprints are part of Home Depot’s strategy to attract new customers and encourage more frequent purchases by offering competitive convenience and service.
For Home Depot, the future remains uncertain as the company seeks to navigate an unpredictable economic and political landscape. The impacts of the high mortgage rate, low housing turnover, and a politically polarized climate are likely to persist, influencing consumer behaviors across the home goods and improvement sectors.
The challenge for Home Depot, and indeed for much of the U.S. retail industry, will be in responding to these external pressures by developing strategies that resonate with consumers, be it through discounts, diversified product offerings, or enhanced customer engagement.
In the meantime, as consumer confidence remains fragile, Home Depot will have to carefully balance its pricing strategies and operational efficiency to weather the current downturn.
