As we look ahead to 2024, one of the themes we expect to pick up steam among retail, CRE, and finance executives is the status of those retail categories that saw a pull-forward in demand during the pandemic but have since retrenched. In general, these categories–consumer electronics, home furnishing, home improvement, and sporting goods–were among the weakest performing categories in retail during 2023, including weakness throughout Q4 2023 (Best Buy’s strong Black Friday visitation trends were the exception to the rule) as we show below. We’ve previously looked at why we might start to see consumer electronics benefit from the start of a new replacement product cycle in 2024, why we expect more consolidation across the home furnishing category in 2024, and how new store formats may help chains like Dick’s Sporting Goods overcome headwinds in the sporting goods category.
With Home Depot reporting Q4 2023 results this week, we thought we’d also take a few minutes to revisit the home improvement retail category. The home improvement category undoubtedly faced its fair share of challenges in 2023, including consumers’ increasing price sensitivity and higher interest rates–which prompted a shift away from large-scale remodels and big-ticket discretionary purchase in favor of smaller home projects–and a sharp decline in existing home sales. It’s unlikely that these trends will abate in the first half of 2024, and when coupled with unfavorable weather headwinds to start the year, it’s reasonable to ask what to expect from this category in 2024?
For the quarter ended January 2024, Home Depot reported that U.S. comparable-store sales fell by 4%, with a decrease in comparable transactions and comparable average ticket weighing on results (globally, Home Depot’s comparable transactions decreased 2.1%, and comparable ticket decreased 1.3%). By month, comparable sales declined -2.7% in November, increased +0.6% in December, and decreased -9.1% in January (which lines up with our visitation data, presented below). As has been the trend during 2023, consumers were less willing to spend on big-ticket transactions (those over $1,000), which were down 6.9% compared to last year’s fiscal fourth quarter (Management called out softer engagement in categories like flooring, countertops and cabinets).
Despite the slow start to 2024, we still see several positive factors that should drive positive visitation trends for the home improvement category in the years to come. These include the aging of the U.S. housing stock (according to Home Depot management, 50% of homes in the U.S. are over 40 years old) and home values/equity that are still ahead of where they were before the start of the pandemic. According to management, home price appreciation is up 45% and home equity is up closer to 70% (which represents a $10-$12 trillion increase since the pandemic and has been largely untapped). On top of these trends, the shortage in new homes (which management pegged at 2M-6M units) and the opportunities for millennials to fill these houses as they come to market should offer a considerable tailwind in the years ahead (Management noted that millennials were “a year or so away of becoming the single biggest source of customer segment spend” in the home improvement retail category).
Home Depot expects total sales growth to outpace comparable store sales this year, with total sales growing +1% and comparable sales falling -1% compared to fiscal 2023. The difference between the total sales number and comparable sales is new store openings, as we expect the company to add 16 new stores next year (and approximately 80 new stores over the next five years) to its current network of over 2,300 stores throughout North America. Based on the whitespace opportunity presented by migration trends, this strikes us as a reasonable goal. When we look at the population change by Core-Based Statistical Area (CBSA) and compare it to median age by CBSA using Placer’s Migration Trends Report (below), we get a clearer picture of where the increased demand for home improvement retail may take place (and those markets which Home Depot and other home improvement retailers may prioritize in the future). For additional insights on the future of the housing market, please refer to our outlook from Jan. 27.
