Home Depot’s earnings calculations. Why the stock is falling.

Home Depot (ticker: HD) reported earnings of $3.82 per share in the first three months of the year, slightly above the $3.80 expected by analysts surveyed by FactSet. But quarterly sales of $37.8 billion were below estimates of $38.3 billion, which the company blamed on falling lumber prices and unfavorable weather.

It got worse with the economic forecasts. Home Depot now estimates sales will fall 2% to 5% from 2022, while in February it said annual sales would be flat year over year. It also cut guidance for earnings per share, saying they were likely to slip 7% to 1[ads1]3% year-over-year, compared with an earlier call for a decline in the mid-single digits.

“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. Home Depot’s finance manager.

Barron’s previously noted that lower lumber prices, which had increased during the pandemic, would likely weigh on same-store sales. Nevertheless, the 4.5% drop in comparable sales was worse than the 1.6% drop analysts expected. It represents the biggest quarterly decline in more than a decade, and reflects both lumber prices and lower demand.

The company’s decision to cut its 2023 financial forecast so early in the year may make sense, but it has also spooked investors who hoped — too optimistically — that recent trends would show that consumers had simply postponed home improvement projects during a wet and stormy time. our. The more conservative view implies that it does not happen.

“We think investors were bracing for a weaker print in the first quarter, but also indications of returning trends in mid-May,” wrote MKM Roth analyst David Bellinger. “This morning’s full-year guidance down indicates to us that any acceleration in the second quarter to date has not been enough to instill confidence in the back half amid ‘broad-based pressures’ across the business.”

Shares of Home Depot, a component of the Dow, fell 1.5% to $284.37 in early trading, while the market benchmark was down 0.5%. Home Depot stock had fallen nearly 9% this year by Monday’s close.

Therefore, Mother Nature is not entirely to blame, but is not helping either. The weather has been a major factor complicating business for the home improvement industry, which was already navigating easing macroeconomic turbulence in the economy that is now being worsened by unusually cold conditions. Warmer weather helps stimulate both DIY and professional construction projects.

The weather has been a thorn in the side of similar companies, including Tractor Supply ( TSCO ) and Sherwin-Williams ( SHW ). Tractor Supply said bad weather caused a two percentage point decline in comparable store sales. Its core business leans more toward agriculture — an area even more weather-dependent than home improvement — but the company’s results are often a “decent read” for companies like Home Depot and Lowe’s ( LOW ), Raymond James analyst Bobby Griffin said.

Lowe’s stock fell 1.9% in early trading. “We expect Lowe’s to see a similar headwind from lumber deflation as Home Depot,” said Jonathan Matuszewski, an analyst at Jefferies.

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

Home improvement retailers can still benefit when people aren’t in the market for a new home. The worry for investors is that worries about a recession, along with the cost of financing big-ticket redevelopment plans, have also discouraged people from undertaking renovation projects.

In fact, the results show that consumers feel squeezed. On its conference call, Home Depot noted that business from both do-it-yourself and professional businesses was down in the quarter, with customers shying away from expensive discretionary purchases. Additionally, while the pros still have elevated backlogs relative to history, those backlogs have shrunk since last year, and their projects are shifting away from major rebuilds to more modest upgrades.

Gross margins were also lower in the quarter, hurt by “shrink,” an industry term for inventory losses, including shoplifting, that many other retailers have also cited as a headwind in recent months.

Nevertheless, the management is optimistic. “While the near-term environment is uncertain, we remain very positive about the medium to long-term outlook for home improvement and our ability to grow share in a large and fragmented market,” said Ted Decker, chairman and CEO of Home Depot.

Write to Jack Denton at jack.denton@barrons.com, Teresa Rivas at teresa.rivas@barrons.com and Sabrina Escobar at sabrina.escobar@barrons.com