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Home Depot’s DIY customers are feeling the pinch of higher interest rates, but the home improvement chain is anticipating that “pent-up demand” will eventually shift spending, CFO Richard McPhail told shareholders on Tuesday.
“At some point, spend on housing shifts from discretionary to something that you simply must do,” he said. “We know that there’s pent-up demand for household formation.”
In the meantime, business is hurting: The company’s Q1 earnings showed sales declining 2.3% in the quarter from the previous year. CEO Ted Decker said the drop-off in demand was likely due to “continued softness in certain larger discretionary projects.”
As McPhail put it, Home Depot is “seeing interest rates sort of weigh on the mind of customers.” But it’s not necessarily because consumers can’t afford to fund their home improvement projects. Instead it’s a “deferral mindset,” he said.
“Well, interest rates are coming down soon,” he said. “Our customers tell us, ‘Hey, with that in mind, with that on the horizon, we’re just going to wait.”
Low turnover rate: The upside is that macroeconomic trends might be turning in Home Depot’s favor. Decker explained that staying home during the Covid-19 lockdowns pulled demand forward on certain “big-ticket items” such as grills and patio sets, which has led to lower sales in those categories—but now that effect is “lapping.”
In addition, the US housing turnover rate in the last year and a half has dropped significantly, with one recent report from Redfin showing that the typical US homeowner has spent 11.9 years in their home, up from 6.5 years 20 years ago.
Decker said historically the housing turnover rate has not been a “huge driver of demand,” but that such low rates during the early months of the pandemic represented a “newer hurricane” impacting the business that “we don’t see going much longer.”