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CEO: Wintry weather weighs on Home Depot's Q1 garden sales

Wintry weather weighed on Home Depot Inc.'s fiscal first quarter comparable-store garden sales, although longer-term generational trends boosted diluted EPS 24.6% year over year.

Inclement weather delayed the start of the spring remodeling season, Home Depot's busiest time of year, said Chairman, CEO and President Craig Menear during an analyst call following the release of fiscal first quarter earnings May 15. The delay was most pronounced in the company's garden section, which historically represents approximately 15% to 20% of first-quarter sales. This year, the garden departments had negative comparable store sales, driven by weakness in chemicals, fertilizer, mulch and "live" goods, such as seed or flower, Menear said.

"This clearly is really a garden story for us," he said. "The miss in terms of garden was significant against what we planned."

But longer-term trends are allowing Home Depot's business to continue to grow, Carol Tomé, Home Depot's CFO and executive vice president of corporate services, during the call. Home Depot reported diluted EPS for the three months ended April 29 that jumped 24.6% year over year to $2.08 from $1.67.

Older baby boomers, for example, are opting to stay in their homes as they age, among an overall decline in mobility rates for all age groups, Tomé said.

"Think about what that means for home improvement," she said. "That's just one trend."

That opens more opportunities for Home Depot in its DIY categories, including putting in walk-in showers to eliminate older people slipping in bathtubs, lighting around the house and other security measures, Menear said.

"If you think about flooring, for example, that's something that people look at as they age in their home," he said. "So there's lots of factors that go into how somebody thinks about changing their home if they are aging out in their home."

Home Depot maintained some pricing power in the quarter, enabling it to pass on higher lumber, copper and laundry machine costs related to new tariffs on to consumers, executives said.

The company had "no trouble" passing along higher costs in lumber and copper commodities, Menear said.

"I will say lumber and panel prices are at historic highs," he said. "I don't see that abating at all."

Home Depot has also been able to pass along higher prices due to tariffs imposed by the Trump administration on imports of laundry machines, Menear said.

"The entire industry has accepted that cost increase based on the tariff, and you're seeing retails in all competitors that have gone up, more or less mirroring the impact from the tariff."

The issue of rising interest rates was also raised during the call.

In response to a question from Oppenheimer & Co. analyst Brian Nagel, Tomé said Home Depot is not yet seeing any "red flags" associated with rising interest rates to mortgages, ultimately impacting Home Depot's business.

She said red flags could include the Housing Affordability Index and average ticket prices for transactions at Home Depot stores. Tomé said that in the last recession, ticket sales at Home Depot were about flat, compared to the 5.8% year-over-year growth to $66.02 for the average price per ticket the company saw in the fiscal first quarter.

"It could be an indicator of slowdown in demand or an indicator that competitors are taking your customer away," she said.

The Housing Affordability Index has averaged about 127% in the last few decades, Tomé said, while the composite Housing Affordability Index is at 150.4%, "which is still very good."

"We are super focused on the Affordability Index and what that means in terms of performance by market," she said. "So if the Affordability Index were to reach 127% or under, that would certainly be a red flag."