Home Depot and Target, despite their differences in merchandise, face interconnected challenges in the retail industry. The home improvement retailer’s reduced forecast serves as a cautionary signal for the cheap chic retailer.
Target is set to report its first-quarter earnings shortly after Home Depot recorded its worst revenue miss in over two decades and adjusted its forecast for the year.
Target and other upcoming retailers might encounter a tougher situation
Let’s delve deeper into why Target and other upcoming retailers might encounter a tougher situation compared to the home improvement giant:
Home Depot benefits from a customer base consisting mainly of homeowners. This provides the company with an advantage over many other retailers as its customers possess substantial wealth beyond their bank accounts.
Home Depot’s shoppers are among the most valuable in any market sector
During an investor call, CEO Ted Decker highlighted this distinction, emphasizing that Home Depot’s shoppers are among the most valuable in any market sector. He pointed out that their robust financial positions, secure employment, wage growth, and homeownership have contributed to an overall increase of approximately $15 trillion in home values since 2019, as indicated by Federal Reserve data.
Target & Walmart customers are the younger consumers and low- to middle-income families
On the other hand, Target, Walmart, and other retailers reporting in the near future draw from a more diverse pool of Americans. Younger consumers and low- to middle-income families, who may reside in rented accommodations, face greater financial uncertainties compared to homeowners. This is particularly evident as inflation persists and rising mortgage rates make owning a home increasingly unattainable for them.
Target specializes in selling a wide range of discretionary items. However, with consumers allocating more funds toward essential expenses like food and services such as dining out and travel, the extravagant shopping sprees seen during the pandemic have diminished.
Home Depot’s sales performance reflects this trend. Chief Financial Officer Richard McPhail revealed that the company experienced a decline in sales of high-value items like patio sets, appliances, and grills—luxury purchases that customers can delay. Shoppers have shifted their focus toward smaller home projects instead of large-scale and costlier undertakings.
The year-over-year decline in discretionary spending in the US
The surge in home purchases and projects during the pandemic may have contributed to this change, as such endeavors do not require frequent repetition.
Overall, consumers are now making trade-offs. Data from market researcher Circana (formerly known as The NPD Group and IRI) indicates a year-over-year decline in discretionary spending in the United States. In April, dollar sales of discretionary general merchandise dropped by 7%, while unit sales decreased by 8%.
This is worrisome news for Target since its sales heavily depend on various discretionary categories, including home goods, apparel, and electronics. Compared to Walmart, only 21% of Target’s annual sales come from groceries, highlighting its reliance on non-essential items.
The US currently faces a housing shortage
Despite rising mortgage rates, Home Depot enjoys certain advantages specific to its sector, which help insulate it from the impact of reduced discretionary spending. The United States currently faces a housing shortage, and the median construction year of homes is 1979, according to the American Community Survey. As a result, there is a higher demand for home improvement products due to issues like leaky roofs, broken furnaces, and the need for fresh coats of paint.
Additionally, with rising mortgage rates, more homeowners are choosing to stay in their current residences rather than sell. This dynamic provides homebuilders with increased confidence in the market.
Economic and political events featured in headlines have influenced consumer behavior
During the investor call, Decker expressed Home Depot’s belief in long-term higher demand as homes reach the 20- and 40-year marks, requiring more maintenance due to increased wear and tear resulting from remote work.
Unfortunately, Target does not enjoy these favorable circumstances. Consumers have become more cautious due to factors such as failing banks, rising interest rates, and ongoing discussions about the debt ceiling in Washington, D.C.
Economic and political events featured in headlines have influenced consumer behavior, leading to increased prudence. McPhail from Home Depot noted during an investor call that tighter monetary policy and credit restrictions are shaping consumer mindsets.
In February, Home Depot’s business was trending well, and if seasonal trends were adjusted for, it would have translated to positive comparable sales for the rest of the year. However, things changed in March. Unfavorable spring weather and external factors, including the collapse of Silicon Valley Bank, contributed to a broader sense of caution among consumers.
When consumers are worried about an unstable economy or a potential recession, they are less likely to indulge in discretionary purchases like home decor or clothing, which could affect Target’s sales.
For Home Depot, springtime is its busiest sales season. DIY enthusiasts and home professionals are more inclined to start new projects when the weather is sunny and warm. The shift in seasons also prompts purchases of plants, landscaping tools, and gardening equipment. However, Home Depot faced unexpected challenges as colder and wetter weather, particularly in the US West, including California, impacted sales. Despite this, in regions with favorable weather conditions, Home Depot observed increased sales in categories such as live goods and garden-related items, as mentioned by Decker during the investor call.
Target excels at offering products that align with specific occasions and trends
In contrast, Target’s major sales stretch has already passed. Its fiscal first quarter follows the peak holiday season of November and December and precedes the back-to-school season. Sales of Target’s spring merchandise, such as patio sets and outdoor items, could be affected by inclement weather.
Nevertheless, one potential positive aspect for Target is its focus on seasonal merchandise. From jelly bean-flavored whipped cream during Easter to sparkling wine displays for Mother’s Day, Target excels at offering products that align with specific occasions and trends.
Challenges and outlook
Target faces challenges that differ from those of Home Depot. Target draws a customer base from a more diverse demographic, including younger consumers and low- to middle-income families who may be more financially vulnerable. The reliance on discretionary items and the impact of reduced discretionary spending pose challenges for Target, especially as consumers exhibit greater caution due to economic and political uncertainties.
Furthermore, Target’s timing in the retail calendar, with its first quarter falling after the major holiday season, presents additional obstacles. However, Target’s ability to curate and adapt to seasonal merchandise trends may offer some resilience in the face of these challenges.
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