Home improvement sector faces challenges but holds optimism for recovery

As 2023 came to a close, a cautiously optimistic outlook prevailed among industry observers regarding the home improvement sector’s potential resurgence in 2024. Drawing from significant growth experienced during the pandemic, experts anticipated a modest recovery in sales, with the National Home Products Association (NHPA) initially forecasting an increase of 0.9%. However, the industry faced obstacles almost immediately in early 2024, as adverse weather, ongoing inflation, and high interest rates stifled growth prospects.

In the subsequent months, conditions did not improve significantly. By midyear, the industry observed a troubling year-over-year sales decline of approximately 4.5%, outpacing initial forecasts. MHPA’s assessment indicated that the adverse combination of persistent inflation and weather-related challenges had created hurdles that were not quickly surmountable.

Despite these tough circumstances, the narrative shifted as financial patterns began to reflect some signs of recovery. Analysts noted that inflation rates had eased, alongside the Federal Reserve’s attempts to target interest rates, promoting greater consumer confidence. However, results were mixed. While sales were declining at a slower rate in the third quarter, anticipated positive impacts from interest rate cuts did not materialise as expected. Additionally, the politically charged atmosphere surrounding the upcoming elections contributed to consumer hesitance, further complicating the recovery trajectory.

Notably, some of the largest companies in the home improvement industry reported better-than-expected results for the third quarter. Home Depot and Lowe’s both revised their annual forecasts upwards, citing an improved economy and increased demand for repairs related to hurricanes as pivotal factors. Similarly, Ace Hardware also performed better than anticipated during the quarter.

As the fourth quarter concluded—though final financial results are still pending—the NHPA’s latest analysis revealed that sales were projected to be approximately 3.4% lower than in 2023, a stark contrast to the more optimistic forecasts from other organisations. The Home Improvement Research Institute (HIRI) predicted a reduced decline of only 0.9%, while the Cleveland Research Company estimated a slightly larger downturn of 2.9%.

Looking ahead, industry analysts remain hopeful about achieving positive growth within the next 12 months. Factors contributing to this optimism include a recovering economy, anticipated interest rate cuts, and a shift towards repurchase phases for products that experienced a surge in demand during the pandemic. Analysts are projecting a modest growth rate of 2.1% for 2025, with HIRI suggesting a more aggressive estimate of 3.9%.

However, several variables could affect this growth trajectory, including sustained declines in interest rates and inflation. If inflation were to resurge, the Fed may be compelled to maintain or even raise interest rates, which would likely hinder anticipated growth. Retail-specific trends, such as store traffic, transaction counts, and average transaction size, will also play a significant role in determining the industry’s trajectory. The sector has seen a continuous decline in both traffic and transactions over the previous two years, although the average transaction size has remained stable.

In a broader outlook, the NHPA anticipates that the home improvement industry will return to a more conventional growth trend of 3-4% annually over the next five years. Despite projections of a declining unit count—estimated to fall by 5-6% due to factors such as retirements among the Baby Boomer demographic and decreased rates of new store openings—the overall health of the industry remains robust. Sales from 2019 to 2022 grew by more than 30%, and continued interest from investors on Wall Street and within private equity underscores a positive long-term outlook. The analysis reflects optimism amid the industry’s past challenges, providing a measured but encouraging perspective on the future growth potential within the home improvement sector.

Source: Noah Wire Services