Home Depot's (HD) second quarter earnings call gave investors an inside look at how the Federal Reserve's monetary policy is weighing on the retailer's outlook.
When asked whether the industry had seen a bottom in sales declines, Home Depot CEO Ted Decker offered caution on the rest of the year.
"Fears of a recession, or at least a severe recession, have largely subsided, and the consumer is generally healthy," Decker told investors on the call. "But given all those positives, ... uncertainties remain."
"We don't know how quickly or further the share shift [from goods to services] in PCE will occur and where spending in home improvement, in particular, will ultimately settle," Decker added. "And we don't know how the monetary policy actions, which are specifically intended to dampen consumer demand, what that impact will ultimately have on consumer sentiment in the overall economy."
The company reiterated its guidance for full-year sales to drop between 2% to 5% compared to fiscal 2022 and diluted earnings per share are expected to drop between 7% and 13% compared to last year.
The guidance comes as the Federal Reserve has raised its policy rate to a range of 5.25%-5.50%, the highest level since March 2001, in an effort to bring down inflation. Fed officials have left the door open to another increase this year, which could further hit consumers via borrowing costs and the housing market.
This led to a direct impact on the retail giant, where consumers spent less on big-ticket items last quarter.
"Big-ticket comp transactions or those over $1,000 were down 5.5% compared to the second quarter of last year," Billy Bastek, an executive vice president, said on the call. "After three years of unprecedented demand in the home improvement market, we continue to see softer engagement in big-ticket discretionary categories like patio and appliances that likely reflects both pull-forward of these single item purchases and deferrals."
Consumer 'incredibly resilient'
There were positives in the quarter.
"If you look at our operations, what we can specifically control, we feel great about where we are halfway through this year," Decker said on the call.
He outlined other bright spots in the economy too: "While that shift [in consumer spending] is happening, the overall economy and the consumer in particular have remained incredibly resilient. As we all know, the economy continues to grow with a number — another great GDP print for the second quarter."
Retail sales out Tuesday backed up that sentiment as well, rising 0.7% in July from the previous month, in a positive surprise for Wall Street.
Home equity is also up in the last couple of years, which is good news for Home Depot.
"If you look at the home improvement customer — our core customer, the homeowner — they've seen continued growth in home equity over the last several years, strong job growth, and increases in wages," Decker said. "So the core customer remains strong."
Per CoreLogic, the average US homeowner now owns more than $274,000 in equity, up from $182,000 pre-pandemic. And in July, job growth slowed but held steady while wages rose more than expected, rising 0.4% on a monthly basis and 4.4% over last year.
Lastly, Decker touted Home Depot's "meaningful reduction in inventory." In the second quarter, merchandise inventories stood at $23.3 billion, down $2.8 billion compared to Q2 of 2022.
Now as the company looks to the second half of the year, it's hoping seasonal items offer a clearer picture of consumer sentiment and a boost to sales.
"The nearest-term view of consumer is the engagement in seasonal is led by the consumer," Decker said. "Certainly, the garden business but also things like exterior painting and stain. ... When the weather improved, consumer responded and it was really steady constructive demand."
With Halloween around the corner, Home Depot expects to benefit there too.
"It's not an enormous business for us," Decker said about the holiday. "But to [see] unbelievable engagement ... in that product category, which is 100% discretionary, is a pretty decent telltale of engagement in the sector."
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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