The home improvement market isn’t that hot right now, and that’s for a number of reasons related to the ripple effects from the pandemic. In 2020, consumers were very willing to invest in their spaces, but three years later, the pendulum has swung the other way.
The Home Depot last month missed revenue expectations in historic fashion—it was the worst quarter for the company in 20 years as consumers did away with large home improvement projects. Chief Financial Officer Richard McPhail told CNBC that this year’s pullback was expected, especially because of high mortgage rates and shifts in consumer priorities.
Lowe’s actually met Wall Street’s expectations in Q1—but barely, which is why the company lowered its outlook for the rest of the financial year. Like The Home Depot, Lowe’s was hurt by falling lumber prices and shoppers not looking for big-ticket items.
- In Lowe’s favor, however, is the fact that two-thirds of its sales came from non-discretionary items like appliances.
As mortgage rates and rent prices remain high, home improvement and furniture retailers will have to think about how to target their customers, and that’s putting aside the larger macroeconomic factors like inflation that has Americans picking and choosing between home repair and other services and experiences.
“Now that people can engage again with experiences, whether that's concerts or travel, dollars are just being redirected there,” Mike Rittler, general manager of retail card service at TD Bank, told Retail Brew. “People are really trying to engage in the experience side of things that they were shut off from for a couple years.”
Do your thing: Retailers in the home improvement space do still have customers they can target while business slows down. Home Depot CEO Ted Decker said sales in Q1 were much better among DIY customers, as opposed to home professionals. Roughly 75% of Lowe’s customers are DIYers, whereas that figure is about half for Home Depot.
- It’s still tricky, though. According to a Discover Home Loans survey, 59% of Americans are choosing to delay their home improvement projects with a little more than a quarter (26%) saying they’re scaling down such projects due to inflation and higher costs.
- However, there’s strong demand for home renovation given that 79% of homeowners would rather renovate their current home as opposed to moving into a new one.
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“If the rates stabilize, then that will fuel people’s confidence to be able to buy a home, to be able to start looking, to be able to do projects, whether they’re home-improvement projects or refurnishing projects,” Rittler said. “Right now, it’s the instability of the environment that just kind of spooks people a bit and that’s why those parts of the industry are down.”
Zoom out: For the second straight week, mortgage rates fell last week, which bodes well for prospective home buyers. Also, last week’s CPI data showed that inflation rose only 4%, the lowest rate in more than two years. Also also, the median rent price saw its largest drop since March 2020.
- In short, this means there’s light at the end of the tunnel for home improvement and furniture retailers. It also potentially opens the window for retailers to target younger prospective home buyers who are more willing to dive into homeownership than some of their older counterparts.
“As affordability gets better and the Gen Z folks start to buy houses, that’s going to be a key market for retailers,” Ritter said. “For home improvements to continue to flourish, for furniture sales to continue to flourish—millennials, Gen Z—that’s the market you need to be talking to.”