Home Depot’s outlook could be a warning sign for Target’s earnings
Signage for Target and The Home Depot stores.
Robyn Beck | AFP | Getty Images
home depot And Goal can sell very different types of goods. But the shortened forecast of the hardware store could be interpreted as a warning signal for the cheap-chic retailer.
Target is set to report its first-quarter results on Wednesday, a day after Home Depot announced its worst sales decline in more than 20 years and lowered its guidance for the year.
Here’s a closer look at why Target — and other retailers reporting in the coming weeks — may be in an even tougher spot than the hardware store:
Home Depot customers are typically homeowners.
Home Depot has an advantage over many other retailers: its customers typically own homes. That means they have assets beyond what’s in their bank account.
During a call with investors on Tuesday, CEO Ted Decker emphasized this difference. He described Home Depot’s customer groups as “one of the best customer groups in any market sector.”
“Our customer is stronger than the overall consumer given that they tend to have good jobs, higher wages, home ownership, and combined the value of those homes has increased by approximately $15 trillion since 2019,” Decker said citing data from the Federal Reserve.
On the other hand, Target, Walmart and other retailers reporting in the coming weeks come from a more representative pool of Americans. Younger consumers and low- and middle-income families may be renting homes and may find themselves in a worse financial position than homeowners, especially as inflation persists and mortgage rates make home buying increasingly unattainable for them.
Target sells many discretionary items.
Consumers are not going on the big shopping sprees of the pandemic era, as they pay more for groceries and spend money on dining out, travel, or covering the cost of other services.
Home Depot The sales results were further proof of this. Chief Financial Officer Richard McPhail told CNBC the company has been selling less expensive items like patio sets, appliances and grills — the kind of necessities that customers can put off buying. He added that buyers are tackling smaller home projects rather than larger and more expensive projects.
The pandemic boom in home purchases and projects could also be to blame as these do not need to be repeated frequently, he said.
Still, consumers across the board have started to compromise. US discretionary spending declined year over year, according to data from Circana, a market researcher formerly known as The NPD Group and IRI. According to Circana, US dollar discretionary general merchandise sales in April fell 7% year over year and units were down 8%.
This is worrying news for Target. Sales are driven by many different discretionary categories, including housewares, apparel, and electronics. Just 21% of annual sales come from groceries, compared to nearly 60% at Walmart.
Additionally, even as mortgage rates rise, Home Depot has some industry-specific advantages that could protect it from some of the impact of lower discretionary spending. The US has a housing shortage and the average year a house was built is 1979 the American Community Survey. That means more leaky roofs, busted stoves, and rooms that need a coat of paint.
Additionally, as mortgage rates rise, more homeowners are choosing to stay in place rather than sell them – a dynamic that is giving homebuilders more confidence.
Speaking to investors, Decker said the retailer is ultimately betting on higher demand over the longer term as more homes “reach that 20- and 40-year witching hour” and as people wear down more of their homes while out work remotely.
At Target, these factors do not have a positive effect.
Consumers have become more nervous.
Failing Banks. Rising interest rates. And Tense talks in Washington, DC over debt ceiling.
Consumers are guided by economic and political events that made headlines. In some cases this has led to greater caution.
Home Depot’s McPhail said in an investor call that tighter monetary policy and tighter lending are shaping the mindset of consumers. In February, he said the company’s business was performing well and had it been adjusted for seasonal trends, it would have resulted in positive comparable sales for the rest of the year.
But that changed in March, he said. Not only did unfavorable spring weather come into play, but external factors also came into play – including the collapse of the Silicon Valley bank.
“We think all of this is just making consumers more cautious,” he said.
Consumers worried about an unstable economy — or a recession — might be less likely to buy home accessories or clothing from Target.
At Target’s investor meeting in February, the company said it had already found that higher interest rates and inflation were putting pressure on budgets. The company provided a conservative outlook and said it expects full-year comparable sales to range from a low-single-digit decline to a low-single-digit increase.
Spring is here. The holiday season is over for Target.
The busiest selling season at Home Depot is spring. Do-it-yourself customers and home professionals are more likely to start a new project when the weather is sunnier and warmer. The changing of the seasons also inspires the purchase of new plants, landscaping tools and gardening equipment.
However, that didn’t go as the company expected. In a call with CNBC, McPhail said Home Depot’s sales were impacted by colder and wetter weather in the western United States, including California.
Still, Home Depot saw a springtime upswing in categories like living goods and garden supplies amid good weather, Decker said on the conference call with investors.
Target’s biggest sales surge is already over.
The retailer’s first fiscal quarter comes after the big holiday season in November and December and before the start of the back-to-school season. The sale of own spring items such as patio sets and outdoor items could also be affected by the weather.
A possible bright spot? Target tends to focus on seasonal merchandise, from jelly bean-flavored whipped cream and Easter treats to sparkling wine presentations for Mother’s Day.
https://www.cnbc.com/2023/05/16/home-depot-outlook-could-be-a-warning-sign-for-target-earnings.html Home Depot’s outlook could be a warning sign for Target’s earnings