Wall Street analysts who cover Home Depot (HD) may have to hammer away at their models in coming days after a mixed second quarter and sluggish retail sales sent shares falling more than 5% on Tuesday.
The sell-off likely reflects several key factors.
First, the home improvement giant saw its closely watched U.S. same-store sales only increase 3.4%, falling short of estimates for a 4.9% increase. Customer transactions fell 5.8%. The sales miss reflects a tough sales comparison to last year (+25%) as the pandemic sent people indoors and saw them under home remodeling projects at a boom-type pace.
Home Depot executives warned on a call with analysts that they are beginning to see shifts in spending patterns as people have become more mobile — raising the potential for mixed third and fourth quarters.
"The strong underlying demand across the business continues. During the second quarter we did observe some changing consumer patterns in U.S. as the U.S. economy opened up. This is manifested itself in several ways. We have seen a shift in pattern of sales within the week as our weekday sales performance has actually strengthened relative to the weekend. We attribute this to consumers returning to travel and other recreational activities," explained Home Depot CEO Craig Menear. "And while consumers are returning to pre-pandemic activities, we continue to see them engaged in home improvement projects. We also see customers more comfortable taking on larger projects is evidenced by the continued strength with our Pro customer which outpaced the DIY customer for the second quarter in a row."
Of note, same-store sales in paint, hardware, indoor and outdoor garden fell in the second quarter.
With sales comparisons tough for the rest of the year — and the homebuying boom having slowed — analysts may be concerned with Home Depot's near-term growth rates.
Meanwhile, Home Depot's gross profit margin fell 77 basis points from a year ago (worse than estimates by about 2.3%, per Bloomberg data). The company pointed to supply chain and lumber cost pressures — the former appears likely to continue to be a near-term headwind.
"I'd say we're focused on executing week to week here. There are certainly cost pressures in the environment. And I think we're all dealing with that. But we've dealt with that throughout our history and we are comfortable with our ability to manage through the cost environment, effectively," Menear added on the call.
Here is how Home Depot performed in the second quarter compared to Wall Street estimates:
Net Sales: $41.12 billion vs. $40.66 billion
U.S. Same-Store Sales: +3.4% vs. +4.9%
Diluted EPS: $4.53 vs. $4.42 (estimate range: $4.06 to $4.74)
And finally, Home Depot received no help from government data on its earnings day.
The Commerce Department reported Tuesday morning that July retail sales fell 1.1%, worse than estimates for a 0.3% drop. Excluding autos, retail sales declined 0.4%. Sales at building material and garden stores slowed for the fourth straight month. Sales for the category declined 1.2% from June.
Explained J.P. Morgan economist Daniel Silver, "Sales at building material dealers also have dropped in recent months, with this cooling coming at a time when many housing indicators have softened."
That pullback in spending at building material stores may also reflect stimulus checks being used, pros warn.
"March saw a spike in retail sales as many got government checks in the mail but that pulled forward many sales and we’ve seen a moderation since outside of eating/drinking," said Bleakley Advisory Group Chief Investment Officer Peter Boockvar.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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