Home Depot's sales are improving, but it says consumers are still cautious about spending

• Home Depot posted quarterly earnings and revenue that beat estimates.
• Sales got a boost from the company's acquisition of SRS Distribution, along with hurricane-related repairs and warmer-than-usual weather in much of the U.S.
• Still, the company said consumers are being cautious after a period of high interest and mortgage rates.

Home Depot's quarterly sales rose more than 6% year over year, as it folded in a newly acquired business and hurricane-related repairs and better weather in many parts of the country boosted demand for home improvement supplies, the company said Tuesday.

The retailer also raised its full-year outlook to reflect its better-than-expected third-quarter results and some increased hurricane-related demand in the current quarter. It now projects total sales to increase about 4%, including the impact of acquiring SRS Distribution. It previously expected total sales to rise by between 2.5% and 3.5% for the year. Both of those outlooks include a lift from a 53rd week in the fiscal year and an approximately $6.4 billion contribution from SRS, which sells supplies to professionals in the roofing, landscaping and pool businesses.

The company expects comparable sales to decline about 2.5% for the 52-week period. Home Depot previously projected that industry metric, which includes the company's website and stores open for more than a year, would drop by 3% to 4% compared with the prior fiscal year. 

In an interview with CNBC, Chief Financial Officer Richard McPhail said consumers are still deferring purchases as they wait for lower mortgage rates and borrowing costs and express caution about the economy.

"There is pent-up demand for projects," he said. "Our customers tell us that their lives are changing. Their families are growing. They're upsizing, they're downsizing. They need to move for a job. There is demand for remodeling, and they are putting it on hold until they see a more favorable financing environment. And so the demand is there, the question is, when it's unlocked."

Home Depot customers have continued to put off projects, even though they're in good financial shape, he said. About 90% of the company's do-it-yourself customers own their homes.

Here's what the company reported compared with what Wall Street expected for the three-month period that ended Oct. 27, according to a survey of analysts by LSEG:

• Earnings per share: $3.67 vs. $3.64 per share expected
• Revenue: $40.22 billion vs. $39.32 billion expected

Home Depot shares fell about 1% on Tuesday, closing at $403.08.

Home Depot's sales have gotten hit by economic factors, as higher interest rates slow housing turnover and more than two years of high inflation makes homeowners less willing to spring for discretionary purchases and do-it-yourself projects. The company had cut its full-year forecast for comparable sales in August, citing consumer uncertainty.

Those dynamics persisted in recent months, McPhail said.

Home Depot's net income for the fiscal third quarter dropped to $3.65 billion, or $3.67 per share, from $3.81 billion, or $3.81 per share, in the year-ago period. Revenue climbed 6.6% from $37.71 billion in the year-ago period. 

Comparable sales fell 1.3% in the quarter across the business. That's better than the 3.3% drop that analysts expected, according to StreetAccount. The metric fell by 1.2% in the U.S. 

It marked the eighth consecutive quarter of negative comparable sales at Home Depot, though the smallest drop since the string of declines began. That performance has not weighed on the stock this year.

As of Monday's close, Home Depot's shares are up about 18% this year, trailing the approximately 26% gains of the S&P 500. The company's stock finished Monday at $408.29 a share, bringing its market value to $405.55 billion.

Shoppers visited Home Depot's stores and shopped online about as much as they did in the year-ago period. On average, customers spent $88.65 during those transactions, almost the same as the $89.36 average ticket in the year-ago quarter. 

Those numbers do not include the SRS acquisition and new stores, which contributed to the company's total sales gains. Home Depot expects to open about 12 new stores this fiscal year, which ends in early February.

Weather had a short-term benefit for Home Depot in the quarter, McPhail said. As warmer and dryer weather extended the summer season, customers bought outdoor items like grills or purchased paint for projects, he said. 

Sales related to hurricanes Helene and Milton contributed about one half a percentage point of sales growth to the quarter. Customers bought items to prepare, such as generators, batteries and plywood, and then purchased items for repairs, such as building materials.

Even as Home Depot reports modest growth, some investors have bet the company will see stronger sales in the near future. The Federal Reserve approved its second consecutive interest rate cut last week, a move that shapes what banks charge for consumer debt – such as mortgage rates and the loan a homeowner might take out for a remodeling project. Housing prices remain high and the age of U.S. housing stock continues to drive repair and maintenance projects.

Plus, Home Depot has chased bigger business from home professionals, such as contractors and roofers, to drive sales. Earlier this year, Home Depot acquired SRS Distribution, a Texas-based company, in a $18.25 billion deal, the largest acquisition in the home improvement retailer's history.

Still, McPhail added, it is difficult to predict when consumers' mindset will change and spark higher housing turnover. And he noted mortgage rates have actually increased since the September meeting where the Fed cut rates for the first time since the early days of the Covid pandemic.

"The good news is housing turnover may not be able to get any worse," he said. "The worst of the decline in housing turnover is probably behind us. Now, the question is, 'What unfreezes it and at what point will that happen?'"

The coming year could also bring price pressures for Home Depot, just as inflation cools. It would be among the retailers that could face higher costs if President-elect Donald Trump follows through on plans for tariffs on imported goods, especially those from China.

McPhail declined to say what percentage of Home Depot's goods come from China, but he said most of its supply comes from North America. He said Mexico is "a great source of goods for us."

"We do source from several Asian countries, so we're watching it closely," he said. "We've been focused on diversifying sourcing for years, and we'll continue to assess sourcing decisions going forward."

Some retail leaders, including the CEO of E.l.f. Beauty, have said they may have to raise prices because of tariffs. Footwear maker Steve Madden said it will reduce the goods it imports from China by as much as 45% over the next year.

Along with weather, the holiday season has fueled sales for Home Depot. It sells a wide range of decor, including many different artificial Christmas trees. 

Since the company's 12-foot skeleton, Skelly, became a viral sensation over Halloween, Home Depot has debuted other eye-catching – and often oversized – decor, including an 8-foot Santa Claus and a large animated reindeer.

"I don't think there are many neighborhoods in the U.S. that don't have our Home Depot giant outdoor decor," he said. "So we're coming to your neighbor's front yard, and you don't want to be outdone."