New York () — Americans became do-it-yourselfers and fixers during the pandemic, sprucing up their apartments, houses and condos while stuck inside and tired of seeing the same drab interior every day.
But the covid emergency is behind us, prices are (much) higher, consumers are increasingly fearful of a recession, and people are spending less at Lowe’s and Home Depot.
Lowe’s lowered its profit and sales forecasts for the year on Tuesday, saying consumers are spending less on home improvements. This comes after rival Home Depot also posted disappointing sales and a grim forecast last week.
“We are updating our full-year forecasts to reflect softer-than-expected consumer demand for discretionary purchases,” Ellison said. “We remain optimistic about the medium and long-term prospects for the home improvement business.”
Lowe’s shares rose 2% on Tuesday.
That optimism also hinges on finding a different customer, where having rural stores “gives us an opportunity to drive sustainable earnings growth because of the much lower expense base,” Ellison said.
Home Improvement Depression
The end of a long and strong investment by homeowners in home improvement projects during the pandemic forced Lowe’s and rival Home Depot to look for ways to offset slowing business.
“Lowe’s is getting a case of the home improvement slump,” retail expert Neil Saunders, managing director of Global Data, said in a note Tuesday.
On the consumer side, the slowdown in the real estate market is sapping the number of people undertaking home improvement projects, Saunders said.
“This hasn’t helped Lowe’s, although arguably the burden falls more on Home Depot, as movers tend to undertake heavier and more serious remodeling projects, which traditionally favor Lowe’s biggest rival,” he said.
Bill Darcy, CEO of the National Kitchen and Bath Association, said homeowners are nervous about the economy. Some have put large-scale projects on hold, while others are shifting to smaller, lower-cost projects, he said.
Among the trends he’s seen: Consumers are now preferring lower prices over big-name brands, are turning to factory-made cabinets over custom millwork, and buying less expensive countertops.
According to Darcy, project completion is starting to falter. “Annual project completions are up 1.8% in Q1 2023 on a year-over-year basis, slowing from 6.5% in Q4 2022. Consumers are pausing large-scale projects until the economic conditions stabilize,” he said.
sales slowdown
Lowe’s said sales at stores open at least a year fell 4.3% in the latest quarter. Ellison noted that lumber prices have plummeted as supply and demand finally rebalanced after years of tight supply chains. The CEO also blamed bad weather, since rainy days in the West weren’t exactly the most favorable conditions for building a shed or installing new soffits.
But discretionary purchases from retailers across the country count for the same thing in unison: consumers no longer spend on things they don’t need. Target, Walmart and Home Depot have all signaled in the past two weeks that discretionary purchases have declined across the board. People are spending more on groceries and other essentials and less on clothes and gutters.
Consumers have not yet thrown in the towel completely: travel spending continues to be higher. But it seems that inflation has finally caught up with the United States. Prices are 4.9% higher now than a year ago, the Labor Department reported earlier this month.
In the first quarter, Lowe’s total sales fell 5.5% to $22.3 billion. Profit fell 3% to $2.3 billion.
The company expects annual sales to be between $87 billion and $89 billion this year, compared with a previous estimate of between $88 billion and $90 billion.
In stores open at least a year, Lowe’s now predicts that sales will fall as much as 4%. Sales were previously expected to be flat or down 2%. In addition, Lowe’s lowered its earnings forecast by 3% from its initial forecast.
low cost market
Lowe’s needs a new, more reliable engine of growth amid slowing sales at its vast fleet of urban retailers, and it seems to have found it: rural America.
“While in the past our penetration of rural and remote stores was seen as a competitive disadvantage, we now expect these stores to be a key component of our operating profit growth over the next 3-5 years,” said Marvin Ellison, Lowe’s CEO. , this Tuesday during the company’s earnings call with analysts.
The home improvement retailer also announced that it will expand its country store format to up to 300 additional stores by the end of the year. The rural stores will focus on “a broader offering of farm, ranch and outdoor products that positions Lowe’s as a one-stop business convenient for rural customers to get what they need in one shopping trip.”
Lowe’s said its rural store would serve the specific indoor and outdoor needs of rural homeowners with product categories such as pets, livestock, trailers, fencing, utility vehicles, clothing and specialty hardware.
The company’s enthusiasm to push more aggressively into small rural communities comes as its sales in large metropolitan markets have slowed in the aftermath of the pandemic.
Lowe’s has had success with pilot projects it implemented a year ago to test stores tailored to rural shoppers.
“When we look at the pilot stores where we’ve been very diligent in going after those specific categories of apparel, farm and ranch items as part of our expansion opportunity, we actually saw an improvement in sales per square foot,” Ellison said. .
“We see this as a unique opportunity with a lower expense base. If you can have a lower expense base, then you can improve sales per square foot,” he said.
Ellison said it might even make sense for Lowe’s to introduce specific products that saw high levels of sales among rural shoppers at its non-rural stores.
“We’re seeing products like utility vehicles, with no idea if customers will respond, and it’s been an incredible growth category for us,” Ellison said. “We found categories in these rural stores that we think will be relevant in non-rural locations.”
