Home Depot Inc. forecast annual profit below Wall Street expectations on Tuesday as soaring prices weigh on demand for home improvement products, while it grapples with higher costs and labor shortages.
The No. 1 U.S. home improvement chain posted a surprise drop in fourth-quarter comparable sales, sending its shares down about 4% in premarket trading. Shares of smaller rival Lowe's Cos Inc. also slipped.
Following an exponential surge in remodeling activity during the pandemic, demand for home improvement tools such as paint and flooring is now cooling as consumers cut back spending, setting the company up for a challenging 2023.
"The macro environment seemingly has caught up with Home Depot," said D.A. Davidson analyst Michael Baker as it now braces for the impact of higher borrowing costs and declining home prices.
Home Depot is also seeing elevated input costs despite taking cost control measures, while a tight U.S. labor market has prompted it to invest more in employee wages and benefits.
The company said it would spend $1 billion more in annualized compensation for its frontline, hourly associates, a move that Wells Fargo analysts said could raise doubts around the profitability of Home Depot.
Rising wages and weak consumer sentiment also led retail bellwether Walmart Inc. to take a cautious stance for 2023 as it forecast annual profit below estimates on Tuesday.
Home Depot's comparable sales fell 0.3% in the fourth quarter, driven by a 6% drop in customer transactions. Analysts on average expected a 0.6% increase.
The company expects earnings per share to decline in the mid-single digits percentage range for 2023, while analysts were expecting a 0.4% increase to $16.72, according to Refinitiv data.
It also projected 2023 sales growth to be flat compared to fiscal 2022.
