Home Depot on Tuesday reported sales growth for its fiscal second quarter but said customers are still reluctant to pursue large home improvement projects because of higher interest rates and economic uncertainty.
The company also noted “modest price movement” on certain goods caused by tariffs instituted by President Donald Trump.
Home Depot is an economic bellwether and its financial results are closely watched as a gauge of consumer spending and the housing market.
The Vinings-based retail giant said same-store sales grew 1% in its latest quarter, but that didn’t meet analysts’ expectations, according to Bloomberg.
Its cost of sales rose nearly 5% to $30.1 billion compared to the same period last year.
Home Depot kept its guidance in place, saying it still expects sales across its footprint to grow 2.8% for the fiscal year.
While high interest rates have kept prospective homebuyers on the sidelines and slowed renovation activity, Home Depot customers have engaged “more broadly in smaller home improvement projects,” Ted Decker, chairman, president and CEO, said during a Tuesday conference call.
The rate environment is giving customers pause on larger remodeling projects that require debt financing, said Richard McPhail, Home Depot’s chief financial officer.
“They’re deferring projects,” he said. “They’re not canceling projects.”
Trump’s tariff policy has complicated the year so far. While the stock market has rebounded from earlier instability, U.S. consumer sentiment fell in August as a wave of new tariffs took effect early this month, fueling fears of rising inflation and unemployment.
Almost 60% of consumers expect to cut back on spending this year if there are large price increases, according to an Aug. 15 report from the University of Michigan’s Surveys of Consumers.
Shifting tone of tariffs
Home Depot said last quarter it did not expect widespread price increases on products and was working to diversify where it buys inventory. The retailer sources more than half its products in the U.S.
Tuesday, the company’s tone shifted on tariffs.
“Obviously, tariff rates are significantly higher today,” said Billy Bastek, executive vice president of merchandising. “So, as you’d expect, there will be some modest price movement in some categories. But it won’t be broad-based.”
Home Depot’s customers tend to shop for an entire project, he said. For example, a customer might buy tile, grout, a bathtub and vanity for a bathroom project.
“We’re laser focused on protecting the cost of the entire project,” Bastek said. “We’re going to take a portfolio approach.”
In its second quarter, he added, the company reduced its promotional activity on smaller garden products, such as mulch and chemicals.
“The company believes it is relatively well-positioned even if it has to sustain higher costs, given Home Depot’s customer base tends to be stronger financially than U.S. consumers generally,” according to a note from Joe Feldman, senior managing director and assistant director of research at Telsey Advisory Group.
Decker said some relief on interest rates could help its business. He also expects Trump’s tax cuts to put more money in customer’s wallets.
Still, he noted: “The number one reason for deferring the large project is general economic uncertainty.”
Building its pro business
Home Depot was optimistic about the second quarter, calling it the company’s “Super Bowl season” in a May earnings call.
The company said Tuesday the quarter met its internal expectations. Its sales grew almost 5% to $45.3 billion in the quarter that ended Aug. 3.
Home Depot reported net income of almost $4.6 billion, largely unchanged year-over-year.
Sales at U.S. existing stores increased 1.4%. Home Depot opened three new stores during the quarter.
The company has increasingly leaned on professional contractors to help fuel its growth. Last year, it bought building products distributor SRS Distribution for $18.3 billion, the company’s largest acquisition ever. It specializes in roofing, landscaping and pool supplies.
Earlier this year, Home Depot said SRS would buy GMS, a Tucker-based specialty buildings products distributor, in another multibillion-dollar deal.
On Tuesday’s call, company executives touted how the GMS acquisition will boost the SRS network with new sales associates and an expanded fleet of trucks.
Home Depot aims to simplify the buying process for contractors by reducing their number of suppliers and deliveries. With SRS, the company is also ramping up its trade credit capabilities, which is lifting contractor spending, Decker said.
“We are satisfying these larger pros and their complex purchase occasions,” Decker said. “The momentum is building.”
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