How Inflation Is Causing Consumers To Spend More Often At Home Depot
Home Depot's customer resilience is high, which boosted sales by about 6% in the last year for the home improvement giant, but the gains can also be attributed to higher average end-sale amounts due to inflation.
Finally, a bright spot is starting to shine through the inflation darkness that has engulfed countless businesses. While other companies have continued to report a drop in sales and revenue, there is news that at least one company has seen recent success. And that company is Home Depot.
Customers love hitting up Home Depot for everything from lumber to home improvement to gardening. And despite the rapid rise of raw materials prices, the home improvement company continues to post a strong financial performance. Their reported earnings from the third quarter are no exception.
The company boasted a 6% increase in sales over last year. That number far surpassed Wall Street’s expectations. Unfortunately, the sales bump is due primarily to high inflation.
Home Depot reported a 4% drop in customer transactions over the previous year. So that means the increase in sales is due to fewer customers spending more money. And based on the company’s data, that assumption pans out.
According to CNN, “Home Depot noted that the average customer ticket was nearly $90, up about 9% from a year ago.” And the numbers from the third quarter earnings report echo the company’s performance so far this year. Although they have seen roughly 5% fewer customer transactions in 2022, the amount per transaction is up approximately 10%.
A Third Bridge analyst, Shoggi M. Ezeizat, told CNN that it was likely due to how customers view their homes. Ezeizat said, “despite a rising cost environment, consumers typically continue to treat their homes as assets worth of investment.” And that is one of the reasons why Home Depot left their end-of-the-year forecasts unchanged.
Company leadership believes consumers will continue to spend, even in an uncertain economy. Richard McPhail, chief financial officer, said, “we are operating in a broad-based inflationary environment, not seen in four decades while managing through constrained global supply chain conditions, all against the backdrop of monetary policy shifts intended to moderate demand. To date, our customer has proven resilient.”
That resilience has been good news for the company in recent months. Home Depot’s shares went up 2% Tuesday morning. And that helps take the edge off a 25% drop in market value since the start of the year.
However, consumer confidence in the economy and future inflation data will determine what happens. The housing market is softening significantly amidst the latest rate increase from the Federal Reserve. And with a looming global recession, nothing is certain.
Currently, some consumers are still spending at Home Depot, which is welcome news. But that may change if prices continue to skyrocket. Consumers keen on DIY projects may not have the funds to keep up with planned projects if prices keep rising.
The managing director of GlobalData, Neil Saunders, advised caution as we get closer to next year. He said, “moving into 2023, the picture becomes more complicated and much depends on the trajectory of the economy. Pressures on consumers will continue to mount, and the backlog of home projects will be reduced, so the year ahead could be a much softer one.”
