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Home Depot cuts forecasts, signals weakness ahead for big US retailers

Published 05/16/2023, 06:10 AM
Updated 05/16/2023, 09:51 AM
© Reuters. FILE PHOTO: The logo of Home Depot is seen in Encinitas, California April 4, 2016.  REUTERS/Mike Blake/File Photo
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By Deborah Mary Sophia

(Reuters) -Home Depot Inc on Tuesday cut its annual sales forecast and projected a steeper-than-expected decline in profit, stoking fears about inflation-wary consumers trimming discretionary spending as a big earnings week for U.S. retailers rolls out.

Shares of the largest U.S. home improvement chain, which also blamed a wet start to Spring and falling lumber prices for a first-quarter sales miss, tumbled about 4%, while those of smaller rival Lowe's (NYSE:LOW) Cos Inc dropped nearly 3%.

Home improvement retailers have lost their pandemic-era sparkle as Americans cut back spending on remodeling their living spaces, with persistent inflation dragging consumer sentiment to a six-month low in May.

Demand was weak for discretionary items like patio furniture and grills, as well as appliances, flooring, kitchen and bath, said William Bastek, executive vice president of merchandising at Home Depot (NYSE:HD).

A shift in focus toward travel, vacations and other services also pinched, driving quarterly comparable sales down 4.5%, bigger than analysts' estimate for a 1.74% drop.

"It's definitely a surprise. The speed and magnitude of the weakness is surprising relative to what we were thinking," D.A. Davidson analyst Michael Baker said.

Home Depot kicks off a big week for U.S. retailers, with Target Corp (NYSE:TGT) and Walmart (NYSE:WMT) Inc scheduled to report results on Wednesday and Thursday, respectively.

"The U.S. consumer is a little bit more uncertain than they were a few months ago. And I think that's going to be a common theme for what we hear from the other retailers," Truist Securities analyst Scot Ciccarelli said.

© Reuters. FILE PHOTO: The logo of Home Depot is seen in Encinitas, California April 4, 2016.  REUTERS/Mike Blake/File Photo

Home Depot now expects fiscal 2023 comparable sales to fall between 2% and 5%, compared to its prior outlook for nearly flat sales. Analysts were expecting a 0.9% decline, according to Refinitiv IBES data.

The company forecast earnings per share to decline between 7% and 13%, compared to a mid-single digits drop estimated previously, even as it posted a quarterly profit of $3.82 per share, above estimates of $3.80.

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