Home Depot and Lowe’s just shed some light on the broader economy. Should investors be worried?

Home deposit (NYSE:HD) and Lowe’s (NYSE: LOW) benefited from a massive shift in consumer spending at the start of the pandemic. Forced to work, learn and play at home, people have been spending in droves on home improvements. With major COVID restrictions lifted, consumer spending is changing again.

The latest results from Home Depot and Lowe’s show that inflation is eating away at budgets and slowing sales growth.

Home improvement sales slow as inflation soars

The Home Depot’s first quarter of fiscal 2022 ended May 1. During this period, net sales increased 3.8% year over year to $38.9 billion. This marks a considerable slowdown from the 32.7% revenue growth recorded in the same quarter last year. CEO and President Ted Decker commented, “The strong performance in the quarter is even more impressive as we compare to last year’s historic growth and faced a slower start to spring this year. People were spending a lot more time indoors during the period a year ago, so they looked to improve their living spaces.

Data by YCharts.

Rival Lowe’s saw a similar decline in sales momentum in its most recent quarter (ended April 29), when it reported a 3.1% year-over-year sales decline. This time last year, Lowe’s posted revenue growth of 24.1%.

Thus, both home improvement retailers reported a sudden deceleration in their robust growth. This shift suggests that consumers are shifting their focus (and spending) to other categories like restaurants and travel. Additionally, retail results indicate that inflation is weighing on overall consumer demand.

For example, in its most recent quarter, Lowe’s reported that average customer transaction value increased 9.3% year-over-year. At the same time, the number of transactions decreased by 13.1%. Similarly, Home Depot reported that the average ticket size increased by 11.4%, while the number of transactions decreased by 8.2%.

As consumers watch companies raise prices for everything from home improvement supplies to fuel, they are reining in some of their spending. According to the Bureau of Labor Statistics, the consumer price index jumped 8.3% in April. The United States has not seen these levels of inflation in decades. It’s no surprise that people hesitate before pulling out their wallets.

Annual chart of the consumer price index in the United States.

Data by YCharts.

Investors should not panic

That said, investors should proceed with caution. The coronavirus pandemic has created ripple effects, reducing the ability of various industries to meet customer demand. This mismatch between supply and demand put upward pressure on prices, fueling inflation.

Either way, when investors try to buy and sell in response to perceived economic changes, market timing is nearly impossible to implement effectively. The best strategy is to buy a diversified basket of stocks and hold them for five years or more. Investors should not panic and sell their investments now.

10 stocks we like better than Home Depot
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They just revealed what they think are the ten best stocks investors can buy right now…and Home Depot wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Portfolio Advisor Returns as of June 2, 2022

Parkev Tatevosian has no position in the stocks mentioned. The Motley Fool fills positions and recommends Home Depot. The Motley Fool recommends Lowe’s. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Comments are closed.