Last week, we highlighted Home Depot’s Q1 2023 results and concluded that while consumer price sensitivity and the shift away from large-scale remodels in favor of smaller home projects would impact near-term results for the home improvement retail category, there were ultimately several underlying factors that supported positive visitation growth in the years to come including the aging of the U.S. housing stock and home values/equity that are still ahead of where they were before the start of the pandemic. Lowe’s update this week supported this viewpoint while offering some additional reasons to be optimistic about the category longer-term.
Home Depot management noted that the shift to smaller home projects started to negatively impact its Pro customer visits in early April, around the same time we started to see weekday visits (a proxy for Pro customer visits) underperform weekend visits (a proxy for DIY customers). For Lowe’s, we also observed that weekday visits started to underperform weekend visits around mid April (below), but the gap was much narrower than what our visitation data showed for Home Depot. We largely attribute this to the fact that Lowe’s core Pro customers are typically smaller-to-medium sized professional customers, although retailer-specific initiatives like a Pro customer rewards program and CRM platform and improved Pro assortment and inventory depth likely played a part. Against a rising interest rate backdrop, it’s reasonable to assume that larger-scale projects will be put on hold for the near future, but smaller home projects are likely to persist amid elevated household wear-and-tear.
Lowe’s also touched on a theme we’ve been discussing for over a year now: retailers increasingly finding fertile ground for growth in smaller and even rural markets. According to CEO Marvin Ellison, “our penetration of rural stores gives us an opportunity to drive sustainable profit growth due to the much lower expense base that's required to operate these stores. As an example, what we spend to operate our store in Philadelphia, Mississippi is significantly less than the cost to operate one of our stores in Philadelphia, Pennsylvania. While in years past our penetration of rural and remote stores was viewed as a competitive disadvantage, we now expect that these stores will be a key component of our operating profit growth over the next three to five years.” Placer.ai data supports this viewpoint, as visit per location for Lowe’s stores in the Top 25 designated market areas (DMA) in the country were roughly 5% below its non-Top 25 DMAs in 2022.
With migration trends supporting growth in smaller markets, it’s not surprising that Lowe’s announced it is scaling its rural framework to add a wider offering of farm, ranch and outdoor products (including pet, livestock, trailers, fencing, utility vehicles, and specialized hardware) to an additional 300 stores by year-end. This strategy will put Lowe’s in more direct competition with Tractor Supply Company, which is among the visitation market share winners in the home improvement and rural lifestyle retail categories the past several years.