Target and The Home Depot store signage.
Robin Baker | AFP | Getty Images
The Home Depot and Target Very different kinds of merchandise may be sold. But the home improvement retailer’s sharply lowered forecast could be seen as a warning sign for the bargain-chic retailer.
Target will report its fiscal first-quarter earnings on Wednesday, a day after Home Depot reported its worst revenue miss in more than 20 years and lowered its forecast for the year.
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Here’s why Target and other retailers reporting earnings in the coming weeks may have a tougher time than home improvement retailers:
Home Depot’s customers tend to be homeowners.
Home Depot has an advantage over many other retailers: Its customers often own their own homes. That means their wealth exceeds what’s in their bank accounts.
On a conference call with investors Tuesday, CEO Ted Decker highlighted the difference. He describes Home Depot shoppers as “one of the best customer segments in any market segment.”
“Our customers are stronger than consumers overall when you consider that our customers tend to have good jobs, rising wages and own their own homes, and those homes have collectively increased in value by about $15 trillion since 2019,” Decker said of the Fed data. .
On the other hand, the target, walmart and other retailers that will report in the coming weeks come from more representative groups of Americans. Younger consumers and low- or moderate-income households are likely to rent homes and apartments and feel more financially precarious than homeowners, especially as inflation persists and mortgage rates make buying a home out of reach for them. case.
Target sells a lot of discretionary items.
Consumers won’t be shopping as much as they did in the pandemic era because they’ll be spending more on food, eating out, traveling or paying for other types of services.
Popular booms in home buying and projects could also be to blame because they don’t need to be repeated as often, he said.
Overall, however, consumers have begun to make trade-offs. Discretionary spending in the U.S. fell year-over-year, according to market research firm Circana, formerly The NPD Group and IRI. Circana found that discretionary general merchandise dollar sales fell 7% year-over-year in April, with unit sales down 8%.
For Target, this is troubling news. Its sales were driven by many different discretionary categories, including home goods, clothing and electronics. Just 21% of its annual sales come from groceries, compared with nearly 60% for Walmart.
Plus, Home Depot has some industry-specific advantages — even as mortgage rates rise — that could insulate it from some of the impact of lower discretionary spending.According to the report, there is a housing shortage in the US, and the median year a home was built is 1979 American Community Survey. That means more leaky roofs, broken furnaces and rooms in need of repainting.
Plus, as mortgage rates rise, more homeowners are opting to stay put rather than sell — a dynamic that gives homebuilders more confidence.
On a conference call with investors, Decker said the retailer is finally betting on the stock as more homes “get to 20 and 40 years of age” and people put more wear and tear on their homes. Note that long-term needs will increase when working remotely from home.
Target doesn’t have those factors in its favor.
Consumers have become more sensitive.
Failed bank. Interest rates rise.and Negotiations on the debt ceiling are underway in Washington, D.C.
Consumers are taking their cues from the economic and political events making headlines. In some cases, it led to more caution.
Tighter monetary policy and tighter credit are shaping the mindset of consumers, Home Depot’s McPhail said on an investor conference call. In February, he said the company’s business was trending well, and that if adjusted for seasonal trends, comparable sales would turn positive for the rest of the year.
But that changed in March, he said. Not only has the unfavorable spring weather hit, but external factors have also played a role — including the collapse of Silicon Valley Bank.
“We think all of this will just make consumers more cautious,” he said.
Consumers worried about economic instability or a recession may be less likely to shop for home décor or apparel at Target.
At Target’s investor conference in February, the company said it was aware of higher interest rates and inflationary pressures on the budget. It gave a conservative outlook, saying it expected comparable sales to range from a low-single-digit decline to low-single-digit growth for the fiscal year.
spring is coming. For Target, the holiday season is over.
Home Depot’s busiest selling season is spring. Do-it-yourself clients and home professionals are more likely to start a new project when the weather is sunny and warm. The changing seasons also spark enthusiasm for buying new plants, landscaping tools and gardening equipment.
However, this didn’t take shape the way the company expected. MacPhail said on a call with CNBC that Home Depot sales were impacted by cold and rainy weather in the western United States, including California.
Still, where the weather is good, Home Depot is seeing springtime growth in categories like household and garden-related items, Decker said on a conference call with investors.
Target’s biggest sale is over.
The retailer’s fiscal first quarter comes after major holidays in November and December and before back-to-school season begins. Sales of spring merchandise such as patio sets and outdoor gear may also be affected by the weather.
A potential silver lining? Target tends to sell seasonal items, from jelly bean whipped cream and Easter candy to sparkling wine on display for Mother’s Day.