Home Depot’s 1Q 2023 update this past week seemingly sounded alarm bells for retail industry, residential real estate, and the economy in general, as the retailer reported weaker-than-expected results. We had previously looked at the moderation in demand among Home Depot customer’s due to increased price sensitivity, but the company acknowledged that demand fell below expectations during the quarter, which is evident in year-over-year visitation trends (below).
Like a lot of discretionary retail categories, we observed a shift in behavior in March, after the company’s Q4 2022 update and coincidentally right around the time of the Silicon Valley Bank failure (which, when coupled with other regional banking issues, may have had a larger psychological impact on the U.S. consumer than many analysts have acknowledged). For the quarter, Home Depot noted that its comparable average ticket increased 0.2% while comparable transactions decreased 5% (like previous quarters, we believe online transactions account for some of the difference between our in-store visitation data and the reported comparable transaction figure). Excluding core commodities, comp average ticket was primarily impacted by inflation across several product categories as well as the demand for new and innovative products.
Our focus on Home Depot’s last update was increased price sensitivity among DIY consumers. To that end, management called out weakness in a number of big-ticket discretionary categories (including patio, grills and appliances that likely reflects deferral of these single item purchases and pull-forward). Big-ticket comp transactions or those over $1,000 were down 6.5%, compared to the first quarter of last year. However, it was Home Depot’s Pro contractor customers that garnered the most attention this week. Management noted that Pro backlogs are still healthy and elevated (relative to historical norms), DIY customer transactions outperformed Pro customer transactions during the quarter. Moreover, there are a lower number of Pro projects than there were a year ago and the types of projects in these backlogs are changing from large-scale remodels to smaller projects (Pro sales also experienced a disproportionate impact as a result of lumber deflation and a wet start to spring negatively impacted both customer cohorts).
Historically, we’ve used weekday versus weekend visits as a way to evaluate Pro versus DIY visit trends, with weekday visits serving as proxy for Pro customer visits and weekend visits serving as a proxy for DIY visits. While this approach has directionally squared with Home Depot’s reported results in the past, 1Q 2023 was a bit more distorted because of the impact of inclement weather, particularly in western markets like California during March and April. According to management, “We didn't have many good weekends [in March and April] but when we did, sales were incredibly strong.” We see this in Home Depot’s daily visitation data presented below, where the weekends during March substantially underperformed the year-ago period. Adjusting for the Easter calendar shift in early April, we started to see weekday visits underperform weekend visits later in the quarter, and reinforcing management’s comments about a lower number of Pro projects and changes in the size of the project.
We can also see the impact of weather in the quarter looking at Home Depot’s nationwide versus California and San Francisco. According to the company, the impact of weather was most pronounced in these regions by a significant margin. As the region's adverse weather passed, one can see that the traffic softness lingered.
A decline in visitation trends played a part in Home Depot reducing its full-year outlook, with management now calling for a comparable-store sales decline between 2% and 5% (down from earlier expectations of flat growth), an operating margin rate between 14.0%-14.3% (versus previous expectations of 14.5%). Consumer price sensitivity is not going away anytime and will continue to be a larger consideration in consumer purchases this year. Still, when factoring the aging of the U.S. housing stock, and home values and housing equity that are still ahead of 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, even with 2023 being a down year.
