Home Depot has a message for all of the economic naysayers: Hold my plywood.
The home improvement retail giant reported better-than-expected gains in sales and earnings for the first quarter Tuesday and lifted its outlook for the rest of this fiscal year. Shares of Home Depot (HD), one of the 30 stocks in the Dow, initially rose more than 3% before the market opened on the news but was down slightly in late morning trading.
Stocks were broadly higher Tuesday despite weak earnings from retailer Walmart (WMT), another Dow component, which fell about 9%. Home Depot rival Lowe’s (LOW), which will report its first quarter earnings Wednesday, which was down about 2%.
Home Depot has gotten off to a rough start this year because investors are concerned about a possible pullback in housing as interest rates and inflation zoom higher. Shares are still down nearly 30% in 2022 despite Tuesday’s good news.
But new CEO Ted Decker, who took over from longtime Home Depot chief Craig Menear earlier this year, was upbeat. He noted in the earnings release that sales, which rose nearly 4% from a year ago to $38.9 billion, were the highest ever for the first quarter in the company’s history.
“The solid performance in the quarter is even more impressive as we were comparing against last year’s historic growth and faced a slower start to spring this year,” Decker said.
During a conference call with analysts, Decker added that “customers continue to tell us that their homes have never been more important, and project backlogs are very healthy.” He said “that the medium- to longer-term underpinnings of demand for home improvement have never been stronger.”
Home Depot’s solid numbers may help dispel some concerns about an economic slowdown and potential drop in housing prices.
Yes, the Federal Reserve’s rate hike plans may lead to even higher mortgage rates. But experts point out that tight supply for new homes coupled with a still healthy job market should continue to fuel home sales. That’s good for Home Depot.
Higher mortgage rates will “undoubtedly pour some cold water on the housing market,” said Joe LaVorgna, chief economist of the America as Natixis CIB, in a report.
But he added that “ascertaining the steepness of the home price slowdown is unusually difficult due to a chronic national housing deficit — made infinitely worse by the pandemic housing boom, and ongoing supply chain issues which have inhibited the completion of new homes.”
LaVorgna thinks that “just a midsingle digit correction in home prices over the next year is entirely reasonable.”
In other words, it is unlikely that housing prices will collapse completely like they did in the late 2000s. This is not a repeat of the subprime mortgage boom and subsequent bust.
“The main issue for housing is still the shortage of supply. There is not enough out there to meet demand,” said Laura Adams, senior real estate analyst for Aceable, an online real estate education platform. “We’re not expecting this to be another bubble that bursts. There may just be a gradual cooling off this year and next year.”