$Home Depot (HD.US)$ Sales are expected to decline again as the retailer struggles to cope with weak demand and the uncertainty of the latest acquisition.

Home Depot's second-quarter financial report may be more of a patchwork than a complete renovation as the home improvement market continues to struggle.

The retailer's report will be released on Tuesday. Evercore ISI analyst Greg Melich wrote, "Investors are bracing for another weak report, reflecting the home improvement market's continued malaise."

Consumers tend to begin renovation projects before selling their homes or shortly after buying new ones. But many potential homebuyers are still deterred by high interest rates and home prices, leading to fewer home improvement projects. Higher rates also hinder homeowners from undertaking larger, discretionary projects such as kitchen or bathroom remodelling or building new decks until borrowing costs drop.

These macroeconomic challenges have weighed on Home Depot's sales and stock performance in recent quarters. The company's Q1 sales fell 2.3% YoY, below analysts’ expectations.

Analysts are expecting the company's Q2 sales to decline nearly 1% YoY to $42.6 billion, with same-store sales dropping 2.2%, according to FactSet projections. Adjusted earnings per share are expected to be $4.53, compared with $4.65 a year ago.

The market is also growing increasingly concerned that Home Depot may lower its full-year performance guidance, and in this case, weak demand is only part of the reason. Analysts say the company's recent acquisition of SRS Distribution may weigh on earnings per share in the short term.

Wall Street is still abuzz about the SRS acquisition. Opponents point out that the $18 billion purchase will add billions of dollars of debt to Home Depot's balance sheet, leading to a suspension of share buybacks.

But supporters of Home Depot, such as David Bellinger, an analyst at Nomura Securities, believe the acquisition is a "necessary unlock" that will help the company take on larger, more complex project work and ultimately lead to significant revenue and profit growth.

During Tuesday's earnings call, Home Depot's management may field questions about the SRS acquisition as investors try to better understand how it will impact their view of the company.

However, what ultimately has the greatest impact on the stock's performance after the earnings report may not be the company's performance or comments on SRS, but management's view of future home decor demand.

Steven Shemesh, a capital markets analyst at Royal Bank of Canada, believes investors are willing to overlook the recent softness because they hope once rates fall, sales will improve, in turn driving a broader industry recovery.

In fact, Nomura analyst Bellinger's "outperform" rating on the stock is based on this hope. "We maintain our upbeat outlook until a turning point in transaction volume appears, and we believe HD is well-positioned to benefit from a 2H24 industry recovery," he wrote.

Nevertheless, it will take some time for consumers to feel the impacts of lower rates, meaning Home Depot and competitors like Lowe's may still need several more months to see demand pick up. Evercore's Melich believes home improvement spending won't turn until 2025.

Melich wrote, "Expectations around low rates could push 2024 housing and remodeling demand further out, meaning that the duration of malaise (13 quarters of negative flow) and currently sub-trend demand should result in some growth in 2025."

Editor/ping