Home Depot inventory is falling. Here’s why.

It got worse with the guidance. Home Depot cut its outlook for fiscal 2023, now projecting that sales will fall between 2% and 5% from 2022, after saying in February that annual sales would be flat year over year. The group also cut its outlook for earnings per share, which are now likely to fall between 7% and 1[ads1]3% year-on-year, down from previous guidance of a mid-digit decline.

“Given the negative impact on first quarter sales from lumber deflation and weather, further softening of demand relative to our expectations, and continued uncertainty regarding consumer demand, we are updating our guidance to reflect a range of potential outcomes,” said Richard McPhail. the company’s financial manager.

Shares in Home Depot fell 4% in premarket trading.

This is breaking news. Read a preview of Home Depot’s earnings below and check back for more analysis soon.

Punxsutawney Phil saw his shadow when he came out of his cave this Groundhog Day and predicted six extra weeks of winter. Turns out the prediction was at least accurate enough to put a freeze on Home Depot
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which reports results for the first quarter on Tuesday.

Wall Street expects Home Depot (ticker: HD ) to post adjusted earnings of $3.80 a share, down from $4.09 a share a year earlier, according to consensus estimates from data aggregator FactSet. Sales are expected to fall about 1.5% from last year to $38.3 billion, dragged down by a 1.6% decline in same-store sales.

But sentiment is mixed ahead of the earnings report as the home improvement industry navigates macroeconomic turbulence made worse by unseasonably cold weather. Shares in Home Depot are down 9% this year. Warmer weather helps stimulate both DIY and professional construction projects.

“We attribute softer 1Q trends more to adverse weather than consumption softening, although both occurred,” TD Cowen analyst Max Rakhlenko wrote in a note to clients. Rakhlenko, who has an Outperform rating on Home Depot and a $360 price target, lowered his earnings per share estimates to $3.68 per share, well below the consensus figure.

The weather has been a thorn in the side of similar companies that have already reported earnings, including Tractor Supply Co. (TSCO) and Sherwin-Williams (SHW). In an earnings call with analysts, Tractor Supply said bad weather caused a 2 percentage point decline in comparable-store sales. True, Tractor Supply’s core business leans more toward agriculture — which is even more weather-dependent — but the company’s results are often a “decent read” for home improvement retailers like Home Depot and Lowe’s, Raymond James analyst Bobby Griffin said. Griffin has a Market Perform rating but does not have a price target.

Aside from the weather, Home Depot may also face some challenges from softness in the housing market, which has been in a bit of a slump in recent quarters as rising interest rates and mortgage rates hamper consumer demand. As Barron’s previously reported, the spring buying season, which is usually one of the busiest, has been slower than usual this year.

While home improvement stores can still benefit when people aren’t in the market for a new home, investors worry that recession fears have also discouraged people from undertaking renovation projects.

For Morgan Stanley analyst Simeon Gutman, the bigger question is whether Home Depot will reiterate or lower its full-year guidance before the investor conference in June. Currently, the company estimates same-store sales for the full year will be flat. The analyst has an overweight rating and price target of $340.

“If HD sees incremental slowdown, it makes sense to lower guidance now rather than let a negative revision be the focus of the June meeting,” he wrote in a research note. “But a lowered guide would raise the question: why didn’t HD see it coming?”

Write to Sabrina Escobar at sabrina.escobar@barrons.com