Home Depot says inflation has cooled due to earnings report
A cart full of items at a Home Depot store on November 14, 2023 in Miami, Florida.
Joe Radle | Getty Images
Even as Home depot projected 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 inflationary environment is behind us,” Chief Financial Officer Richard McPhail said on an earnings call.
Shares of the retailer rose nearly 6% in midday trading after the company beat quarterly earnings expectations, leading a rally for the Dow Jones industrial average. Home Depot’s comments also came as government data on Tuesday morning showed inflation was flat in October from the previous month.
Home Depot started a week of expected sales gains that include other household names, such as Walmart, Target and Macy’s at. All retailers have been struggling with consumers who have become more selective about spending, especially on more expensive and selective items, as they pay more for essentials such as groceries.
Home Depot is no exception. For several quarters, its customers have bought fewer big-ticket items and taken on smaller, less expensive projects.
But with his comments on Tuesday, Home Depot gave renewed hope that consumers and the wider economy would soon see relief. In the short term, cooling inflation will reduce sales numbers for retailers, including Home Depot. But in the long run, if prices come down or even start to fall, it can free up extra cash that customers can spend elsewhere.
In addition, inflation cooling could be faster at the end of interest rate hikes by the Federal Reserve. The central bank has been trying to tame decades of high inflation without sending the economy into recession.
However, Michael Baker, retail analyst at DA Davidson, said relief will not come soon enough for the holiday season. It is expected to grow slightly in sales for retailers.
“Less inflation may invite a return to some discretionary spending, but that is offset by a generally very soft spending environment,” he said.
At Home Depot, McPhail has described 2023 as a “year of assessment” following an increase in home improvement due to the Covid pandemic. The retailer expects a drop in sales from last year.
But the normalization of other trends has brought predictability to the industry and to customers, he said.
“Some prices are settling at higher levels in 2022,” McPhail said. “Others are settling lower. But we’re seeing some stability there.”
Tools, which sometimes require waiting times of months, are back in stock. Those healthier investment levels have lifted sales in the region, said Billy Bastek, executive vice president of merchandising, on the earnings call.
But some of the factors driving inflation are beyond the control of retailers and affect consumer decisions as well.
Just take the cost of painting a living room, CEO Ted Decker said on the earnings call. He said Home Depot continues to focus on offering low prices. However, he said, he supports the types of advertising that do not make a difference.
He said that cutting the price of paint by $10 would not make a dent in the biggest cost: paying the painters.
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