We recently wrote about how big-ticket durable products (power boats, ATVs, etc.) have yet to find a bottom. This past couple of weeks, we heard from home-related goods retailers with a little bit of a mixed message. Home Depot reported softer results and lowered its outlook. CFO Richard McPhail said, “Pros tell us that, for the first time, their customers aren't just deferring because of higher financing costs. They're deferring because of a sense of greater uncertainty in the economy.” We are less convinced by that explanation. Deflation and interest rates may be larger factors, with households waiting for both project costs and financing costs to decrease. This was also our interpretation of Home Depot's comments on the earnings call.
By contrast, Ethan Allen reported stability in its results and a better pace of business going forward. While Ethan Allen’s business is certainly affected by housing and interest rates; however, this business is depending upon financing than large remodel projects. As such, there isn’t a “deferral” dynamic where customers are waiting for lower rates. While there may be a secondary impact of those deferrals on furniture, it isn’t a primary. We also see evidence of this in the firmer traffic trends for At Home, Bob’s Discount Furniture, and HomeGoods. Relatedly, Sleep Number said they expect sales to be flat in the second half of the year (versus the prior 10% rate of decline), which would put sales levels even with 2019. (Sales per comparable store would still be down double-digits.) Similarly, customer orders from Wayfair are bouncing around even to last year and 10% above 2019 (in other words, trends are showing stability).
Ethan Allen’s retail written orders were down by only 1.3% and the quarter ended on a strong note per management. Retail revenue, which represents deliveries to the customer, was down 7.1%, putting it about even with pre-pandemic levels (compared to down 10% for the prior three quarters). Consolidated gross margin of 60.8% and operating margin of 13.4% remain very healthy. On its new store prototype, CEO Farooq Kathwari said, “Some of our design centers were 20,000 square feet and above. I said, no, the max size is 12,500, and the newer ones we're getting is anywhere from 6,000 to 8,000 or 9,000 square feet...We call them the Interior Design Concept, we redesigned all our design centers with one great look (the move to smaller-format stores has been a consistent theme across home furnishing, including Arhaus and Ikea). Five years back, people in New Jersey, thought they are very different than in Long Island or, I guess, California, Florida. All our design centers today, especially the company operated ones have one image. Now the other thing that we are doing is, now we have been developing a lot of also new product. Again, we have to be cautious that we only bring in product because we don't sell it to anybody else. It's all through our own network, but we have been adding new products.”
On demand and the industry, Wayfair CEO Niraj Shah said, “Customers remain cautious in their spending on the home and our data suggests that the category was down by nearly 25% from the peak we saw in the fourth quarter of 2021. This mirrors the magnitude of the peak to trough correction, the home furnishing space experienced during the Great Financial Crisis...Importantly, this calculation is on nominal dollars. Adjusting for inflation suggests we're now in the midst of a correction in excess of 35% and an unprecedented level of pullback in our sector. We see three clear factors behind this correction. One, the malaise in the housing market; two, overspending in 2020-2021 that as warped the historic replacement cycle; and three, a slowing U.S. economy...Over the first 5 months of 2024, new home sales are down by nearly 20% compared to the first 5 months of 2021, while existing home sales are down by more than 30%...At the end of the day, with housing turnover levels that haven't been as depressed since the Great Financial Crisis. The market fatigue weighs on everyone in the category, ourselves included. On the second factor...controlling for inflation, we measured actual spending from 2020 through the first half of 2024 against a hypothetical environment where the pandemic never happened. Using data from the Census Bureau, the analysis shows actual spend volume coming is now below that hypothetical no-pandemic world...Customers have more than compensated for the overspending during the pandemic and have now underspent in the category compared to historic patterns. This is in spite of the fact that the structural need for products in this category has not changed. As we said many times in the past, people still need mattresses and tables and chairs. They still need desks and bathroom fixtures and kitchen equipment. And at some point, we expect a reversion to the mean, while we've yet to see the housing recovery, replacement for pandemic spending and broader economic upturn, we anticipate these drivers around the horizon. Given how deep we are into the cycle, it's fair to expect the turnaround to come soon, and Wayfair is well positioned to benefit as it does.”
Home Depot’s domestic comparable-store sales for the quarter were down -3.6%, with severe weather (heat, rain, and hurricanes) depressing its seasonal business. The second half of 2024 plan now calls for a similar 3%-4% decline. Reflecting fewer big-ticket projects, comparable transactions above $1K were down -5.8%. Home Depot CEO Ted Decker said, “What we saw this most recent quarter is further pressure in larger projects. And we see that in building materials in lumber categories that are very specifically tied to construction in a larger project. And that was really the change that we saw as the quarter progressed.” The DIY result was less than the Pro business, which likely reflects the large investment that Home Depot is making to drive and grow the Pro business. These investments include Pro services, merchandise, sales engagement, associate selling tools, etc. Of note, these investments by Home Depot and large acquisitions (SRS Distribution was the latest) are resulting in greater business separation between Home Depot and Lowe’s. For Home Depot, a store averages $30M in Pro sales (with a lot of this delivered to the job site) and $30M in DIY sales. By contrast, Lowe’s business split is $12M and $37M. These differences are meaningful to co-tenants and the characteristics of their centers.
