Why Is Home Depot (HD) Stock Dropping and struggling financially?
The tense atmosphere prevailing in the housing market is setting off a chain reaction of repercussions. The combination of high-interest rates and a scarcity of affordable housing is resulting in sluggish movement in home-buying and reduced demand for home improvement projects. The latest victim caught in this cascade is the renowned home improvement retailer, Home Depot.
In the fourth quarter of 2023, Home Depot disclosed a downturn in its sales figures. It recorded $34.8 billion in sales, marking a 2.9% decrease compared to the same quarter in 2022. Additionally, within the U.S. market specifically, comparable sales witnessed a 4% decline.
The company also faced a notable setback in its net earnings during the latter months of 2023. It garnered $2.8 billion, or $2.82 per diluted share, representing a decline from the $3.4 billion, or $3.30 per diluted share, in net earnings recorded during the corresponding period in 2022.
During a recent earnings call, Home Depot’s Executive Vice President of Merchandising, Billy Bastek, attributed the sales decline to a combination of decreased prices and customers tightening their spending habits, opting to avoid undertaking large-scale home improvement projects.
“Our sales were largely in line with our expectations, however, we did encounter some unfavorable impacts from weather in January and core commodity deflation,” noted Bastek. “We observed a continued trend throughout the year, with softness in certain big-ticket, discretionary purchases. Our customers are focusing more on smaller projects while deferring larger endeavors.”
CEO Ted Decker further elaborated during the earnings call, emphasizing the pivotal role of home turnover in driving demand for home improvement. He highlighted a “lag effect” resulting from the challenge of affordability in moving to new homes, impacting sales.
“The lag effect is prolonged this time due to the prevailing interest rate environment, with people exercising caution in initiating larger home improvement projects in homes where they intend to reside for an extended period,” explained Decker.
During the earnings call, Home Depot also indicated its belief that the higher interest rates prevailing in the housing market are likely to continue impacting demand for larger projects throughout 2024.
The housing market continues to grapple with high mortgage interest rates and resistance from consumers, following last year’s plunge in home affordability to levels not seen since the 1980s. Just last week, mortgage rates surged above 7%, coinciding with a 10.6% decrease in mortgage applications, as per a weekly survey from the Mortgage Bankers Association.
“Mortgage rates moved back above 7 percent last week following news that inflation picked up in January, dimming hopes of a near-term rate cut,” remarked Mike Fratantoni, Senior Vice President at the Mortgage Bankers Association.
