In the past, we’ve discussed that home improvement is one of the retail categories that benefitted from a lift in structural demand coming out of the pandemic, with elevated housing prices, increased housing wear-and-tear due to work-from-home, and an aging housing stock prompting more home improvement projects. We’ve also discussed how U.S. homeowners would be more resilient to inflation and interest rate increases given that, out of the 130M homes in the U.S., only approx. 4M are sold in a given year and that 93% of those homeowners have fixed rate mortgages.
With that context, it may have come as a surprise that The Home Depot came out calling for a “year of moderation in demand for home improvement” on its Q4 2022 update this week, citing primarily an increase in price sensitivity among its consumers and the ongoing shift away from goods to services. This outlook strikes us as valid, but with the help of Placer.ai data, we also remain optimistic that home improvement retailers should be able to outperform historical visitation trends in the future.
- State of the home improvement customer. We saw consumers become more price sensitive as 2022 progressed across many categories, including grocery, restaurants, and others, although Home Depot management noted that home improvement shoppers were less price-sensitive “than what they would have expected” throughout 2022. Nevertheless, as the year progressed, management noted some deceleration in certain discretionary categories (particularly for single ticket discretionary items like appliances, grills, and patio). For 2023, management expects inflation to remain a headwind, but also expects its pricing actions will be much lower than they had been the prior two years. Management anticipates that this will result in lower average ticket, but also improvement in the YoY transaction declines. (As we have noted in the past, we believe Home Depot’s physical store visitation trends run moderately below reported transaction growth figures due to the inclusion of online transactions in the reported figures).
- Home Depot remains ahead of pre-pandemic visit per location trends. While Home Depot’s visits per location have declined following two years of abnormally high demand in 2020 and 2021, they still remain ahead of pre-pandemic (2017-2019) averages (below). Interestingly, visit frequency has remained relatively constant for Home Depot visitors (6.2 visits annually in 2022 compared to 6.3 visits in 2019), with a higher number of visits per location indicating that Home Depot is seeing an increase in unique visitors. While price sensitivity among its customers and the goods to service shift may push these numbers even lower for Home Depot in 2023, we believe the fact that Home Depot is attracting a greater number of unique visitors bodes well for future visitation trends as other factors like home wear-and-tear and housing age keep home improvement demand elevated.
- Assumptions behind 2023 outlook. Home Depot offered expectations for flat sales and flat comparable sales growth for 2023, underpinned by three considerations: (1) The company expects flat economic growth and consumer spending in 2023. (2) low-single-digit sales declines for the overall home improvement retail market, which factors in the continued shift from goods to services; and (3) Home Depot expects to capture market share, something that is reinforced by the aforementioned visit per location outperformance.
- Pro update. Home Depot’s Pro sales continued to outpace DIY sales during Q4 2022, with big ticket comp transactions (those over $1,000) were up 3.8% versus the fourth quarter of last year (compared to a total chain comparable transaction decline of 6% for the quarter). Management noted that its backlog for Pro orders is still elevated but down sequentially (calling out strength across Pro-heavy categories like portable power, pipe and fittings and gypsum, but some softness in other categories like laundry, soft flooring and roofing). As a way to monitor Home Depot’s Pro business, we’ve started watching visitation trends (both employees and visitors) at the chain’s Pro customer fulfillment center in Dallas. This facility is a 800,000-square-foot flatbed truck distribution center that can accommodate deliveries within a 75 mile radius of the location, according to a Dallas Morning News story on the opening of the facility in 2020. The center is also on a rail line that’s been extended into the building to better facilitate inbound deliveries. Our data suggests that visitation trends at the Dallas facility remain healthy and well ahead of 2021 levels, although we’ve started to see a decline in visits toward the end of fourth quarter (ending January 29). It’s worth noting that the Dallas market may not be fully reflective of nationwide trends due to unique relocation trends and housing market considerations. That said, we believe visitation trends to the Dallas facility compared to 2021 reinforce the relative health of Home Depot’s Pro business and our optimism for this category going forward
- Visitation rebound beyond 2023? Home Depot’s expectations for “year of moderation in demand for home improvements” in 2023 strikes us as prudent given the price sensitivity that is becoming a larger consideration in consumer purchases and other choices that consumers are making (similar to what Walmart management also noted). Still, when factoring in healthy Pro customer backlogs, rising home ages, and home prices that are still about 40% where they were before the start of the pandemic, we still anticipate visitation trends for this category to outpace historical averages in the years to come.