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Home Depot stock rises on Q3 earnings beat

Home Depot (HD) shares are trending higher Tuesday morning after the retailer reported third-quarter results that beat analyst expectations. However, big ticket discretionary purchases slowed in the quarter and the retailer did narrow its guidance for the fiscal year.

Michael Baker, Managing Director and Senior Research Analyst at D.A. Davidson tells Yahoo Finance that "business is soft out there" and that the stock is likely rallying because the results were "largely in line with lowered expectations."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

SEANA SMITH: All right, guys, let's get to some of our trending tickers ahead of the open. Home Depot beat analyst expectations in its third quarter. It did however see its comparable sales fall 3.1% in the quarter as they continue to see pressure in big ticket discretionary purchases.

Now, the home improvement retailer also narrowing its guidance for the full fiscal year. When we talk about that guidance, that's one of the key points in this report that I wanted to focus in on. Because, yes, we did see Home Depot narrow its guidance.

There was to a certain degree expectation on the street that we could see the guidance cut. So the fact that we did not see Home Depot lower its guidance, I guess, that's good news at least for now. We're seeing the move to the upside here out of the open just about 3%. But it's all about what people are spending and the fact that they aren't really willing to buy those big ticket items given the pricing pressure that they're seeing.

BRIAN SOZZI: Yeah, these appliance prices are up a lot. And put them on a Home Depot credit card, that's a real cost. But days like this, I miss not being a stock analyst. Because I would put out a note here going up against my competitors saying this quarter, it just wasn't that good.

Sure, inventory was down $3 billion year over year and that's great. There's no glut going into the holiday season for Home Depot. But scroll down, gross margins, down operating profits down, net earnings down, customer transactions down, average ticket down, sales per retail square foot down.

This tells me that the consumer that goes to Home Depot has pulled back, higher interest rates are impacting them. And for me, I continue to be-- I'm negative this morning, guys. I'm really just negative on the health of the consumer. I think interest rates are really starting to influence a lot of households and it shows up in this Home Depot report.

BRAD SMITH: Well, it just continues to illustrate a retailer that is going to succumb to the pressure, unfortunately, of low replenishment rates for some of the most costly items out there. Nobody needs three or four lawn mowers. You only need maybe two refrigerators.

BRIAN SOZZI: Well, you need an electric one. You need a gas one.

BRAD SMITH: I don't. I'm sorry. I don't even have a lawn.

BRIAN SOZZI: I don't even-- I don't have a home. I don't have a home. I don't have a home. I don't need any lawn mowers.

BRAD SMITH: And so here, you know, consider this, at the time where you've already seen rising mortgage rates, according to the NAHB, push housing affordability to its lowest index in history since they've been tracking it since 2012 here. One of the huge things to remember here is that more people, if they are already looking at their home equivalent rent or just looking at what they're paying in their mortgage rate right now and seeing that continue to tick up, which according to this data, mortgage rates currently near 8%. Builder surveys indicate that market conditions are going to remain challenging through the end of the year.

And meanwhile, average mortgage rates jumped from 6.59% in the second quarter up to 7.13% in the third quarter. That means you're paying more on a monthly basis. And at the same time, you're probably not going to be spending on a lot of the house renovations that you would have done even if you are staying in that home for longer.

SEANA SMITH: Yeah. And I mean, when we talk about a lot of the challenges, you brought up a lot of great points, right? None of those are going anywhere anytime soon, right?

We talk about the fact that there's so much uncertainty ahead. There's lots of pressure here on the consumer, the fact that people simply cannot afford to maybe do even if it's smaller renovations. They're not able to do that given the fact that they're paying near 8% for mortgage rates.

BRIAN SOZZI: I do want one of those blow-up Santas. I don't have a home, but I just want to stick one of those on the lawn, those 10-foot blow-up Santas.

SEANA SMITH: We had a blow-up skeleton for Halloween.

BRIAN SOZZI: That's pretty cool.

SEANA SMITH: We haven't gotten a Santa though.

BRIAN SOZZI: You didn't send me a picture of that. What's up with that? You're on team.

SEANA SMITH: Oh yeah, skeleton on a bike.

BRIAN SOZZI: OK, well, send me a picture.

SEANA SMITH: And it was moving.

BRAD SMITH: Well, a lot of the EV dealerships might not need the little blow-up doll with the wavy hands and everything.

BRIAN SOZZI: I love those. I'm a sucker for those.

BRAD SMITH: We'll just go-- we'll go poach one of those for you.

BRIAN SOZZI: Oh, just real quickly too, this Home Depot quarter, Macy's reports later this week. The report is going to stink, I'm just saying it right now.

BRAD SMITH: We're going to be watching for it.