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Even as Home Depot forecast sales declines, the retailer had good 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 retailer rose by nearly 6% in early trading after the company beat quarterly earnings expectations, driving a rally for the Dow Jones Industrial Average. The company’s comments also came as federal data on Tuesday morning showed that inflation was flat in October from the prior month.
Home Depot kicked off a much-anticipated week of retail earnings that includes other household names, such as Walmart, Target and Macy’s. All of the retailers have struggled with consumers who have become more selective about spending, particularly on pricier and discretionary items, as they pay more for necessities like groceries.
Home Depot is no exception. For multiple quarters, its customers have bought fewer big-ticket items and taken on smaller, less expensive projects.
Yet with its comments on Tuesday, Home Depot gave fresh hope that consumers and the broader economy could soon see relief. In the short term, cooling inflation reduces sales numbers for retailers, including Home Depot. Yet long term, if prices level off or even start to drop, it can free up extra money that shoppers can spend elsewhere.
Plus, cooling inflation could speed along the end of interest rate hikes by the Federal Reserve. The central bank has been trying to tame decades-high price increases without tipping the economy into a recession.
Still, Michael Baker, a retail analyst for D.A. Davidson, said relief won’t come soon enough for the holiday season. He expects modest sales growth for retailers.
“Less inflation can invite back in some discretionary spending, but that’s offset by the fact it’s generally a pretty soft spending environment,” he said.
At Home Depot, McPhail has described 2023 as “a year of moderation” after the boom in home improvement during the Covid pandemic. The retailer predicts a drop in sales from last year.
Yet the normalization of other trends has brought predictability for the business and customers, he said.
“Some prices are settling at levels higher than 2022,” McPhail said. “Others are settling lower. But we’re seeing some stabilization there.”
Appliances, which sometimes requires months-long wait times, are back in stock. Those healthier inventory levels have lifted sales in the category, said Billy Bastek, executive vice president of merchandising, on the earnings call.
Yet some factors that drive inflation are beyond retailers’ control and influence consumers’ decisions, too.
Just take the cost of painting a living room, CEO Ted Decker said on the earnings call. He said Home Depot remains focused on offering low prices. But, he added, it’s backed off on the kinds of promotions that don’t make a difference.
He said cutting the price of paint by $10 doesn’t put a dent in the bigger cost: Paying the painters.
