We have been talking about the weakness in the U.S. consumer as high inflation erodes spending power.

With the Federal Reserve embarking on its steepest interest rate hiking cycle in the decade, the odds of a recession have increased substantially.

Historically, recessions have tended to occur once the Fed pivots from tightening to cutting rates.

The latest evidence that consumers are struggling comes from home improvement retail giant Home Depot (HD).

Even though Home Depot managed to report second-quarter results that slightly beat analysts’ expectations, the fact that they had to lower their full-year guidance is a clear signal that they’re feeling the effects of weaker consumer demand.

Specifically, the company saw a 3.6% drop in comparable sales during the quarter, a result worse than the expected decline of 2.4%.

This indicates that fewer people are shopping at Home Depot, and those who are shopping are spending less. In fact, customer transactions were down by 1.8%, and the average amount spent per transaction also decreased by 1.3%.

These numbers reflect a broader trend of consumers tightening their belts, particularly on home improvement projects, which are often seen as more discretionary spending.

Home Depot’s sales per retail square foot also dropped by 3.6%, further highlighting the pressure the company is facing. Comparable sales were also down by 3.6%, missing the consensus expectation of a 2.6% decline.

Looking forward, Home Depot’s outlook isn’t particularly rosy. The company now expects comparable sales to decline by around 3.0% to 4.0% for the full fiscal year 2024. This is a significant downgrade from their earlier forecast of about a 1% decline.

Despite these challenges, Home Depot still plans to open around 12 new stores this year. The company is betting that demand will eventually bounce back once the economic environment stabilizes.

However, in the near term, the company is facing some significant headwinds. They’re now expecting a gross margin of about 33.5% and an operating margin between 13.5% and 13.6% for the fiscal year. These numbers are lower than their previous estimates.

Given the current environment and the fact that Home Depot’s stock isn’t particularly cheap, it might be wise to stay on the sidelines for now.

The company’s long-term fundamentals seem solid, but the next few quarters could be tough as consumers continue to struggle.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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