home depot (HD 0.78%) and lowes (LOW 0.95%) were beneficiaries of a massive shift in consumer spending early in the pandemic. Forced to work, study, and entertain at home, people spent heavily on home improvement. Consumer spending is shifting again as key COVID restrictions are lifted.
The latest results from Home Depot and Lowe show inflation seeping into budgets and slowing sales growth.
Home improvement sales are slowing as inflation soars
Home Depot’s first quarter of fiscal 2022 ended on May 1. During that period, net sales rose 3.8% year over year to $38.9 billion. That’s a significant slowdown from the 32.7% revenue growth in the year-ago quarter. CEO and President Ted Decker commented, “The solid performance this quarter is even more impressive as we compared last year’s historical growth and faced a slower start to spring this year.” People spent a lot more time indoors a year ago, so they tried to improve their living spaces.
Rival Lowe’s experienced a similar drop in sales momentum in its most recent quarter (ended April 29), when it reported a 3.1% year-over-year decline in sales. This time last year, Lowe’s posted sales growth of 24.1%.
Both home improvement retailers have reported a sudden slowdown in their robust growth. This trend suggests that consumers are shifting their attention (and spending) to other categories, such as food and travel. In addition, retailer results suggest that overall inflation is taking its toll on consumer demand.
For example, Lowe’s reported last quarter that its average customer transaction value rose 9.3% year over year. Meanwhile, the number of transactions fell by 13.1%. Similarly, Home Depot reported that the average ticket size increased 11.4% while the number of transactions fell 8.2%.
As consumers watch companies raise prices on everything from home improvement to fuel, they’re cutting some of their spending. According to the Bureau of Labor Statistics, the consumer price index rose 8.3% in April. The US has not experienced these levels of inflation in decades. It’s not surprising that people hesitate to pull out their wallets.
Investors should not panic
However, investors should proceed with caution. The coronavirus pandemic has created ripple effects and reduced the ability of various industries to meet customer demand. This mismatch between supply and demand has pushed prices up and fueled inflation.
Regardless, when investors are attempting to buy and sell in response to perceived economic changes, it is nearly impossible to execute market timing effectively. The better strategy is to buy a diversified basket of stocks and hold it for five years or more. Investors should not panic and sell their investments immediately.
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