Huntington Private Bank Director of Wealth Strategy Dan Griffith joins Yahoo Finance Live to discuss Lowe's Q1 earnings report and the impact the company is seeing from a slowdown in consumer demand.
- Shares of Lowe's falling in premarket trade despite beating earnings on both the top and bottom line, the home improvement retailer was hit hard by softening sales growth. Lowe's expecting comparable sales to drop as much as 4% this fiscal year. They're taking a look at some of the actuals versus the estimates on your screen. But if there's two things that kind of serve as a common denominator that we've heard from both Lowe's and Home Depot this earnings season, one, lumber deflation, and that was higher than expected looking into Lowe's and their business outlook even as they were providing that. But also lower than expected DIY discretionary sales. That too something that you heard from Home Depot when they reported.
- Right, exactly. That seems to be not just through line between these two. But when it comes to discretionary spending, the through line were all of the retailers we've heard from thus far, right? Whether we're talking about apparel, or furniture, or electronics, or now, these DIY items. Basically, that consumers are just not spending to the same degree.
And the company cutting its forecast after first quarter comps fell by more than estimated 4.3%. So really seeing a drawback there. One of the things that's interesting here is I was hearing some commentary ahead of these numbers that Home Depot, which also blamed weather effects on its poor numbers, has a much bigger exposure in California where that weather occurred than Lowe's. But Lowe's also talked about unfavorable weather.
- Yeah, they did. And in terms of just putting some of the numbers on that guidance that you mentioned a moment ago as well, they're now expecting for total sales of approximately 87 to $89 billion. Previously, that range was 88 to $90 billion. So that lower, comparable sales, that expected also to be down negative 2% to negative 4%, you compare that to flat to down negative 2%. And then just lastly here, the operating income, adjusted operating income as a percentage of sales, that range was previously 13.6% to 13.8%. That also moving lower to a new range of 13.4% to 13.6%. So those are some of the key areas really that investors zeroing in on this morning as we're seeing premarket shares slumping here a little bit.
- Yeah. And one more thing I just want to mention. Marvin Ellison, the CEO, did call out two areas of strength. He said pro sales were positive on a comparable basis, and online sales were positive on a comparable basis. So just a little bit of positivity there in what overall was a little bit of a heavy report to be sure.
- Yeah. Let's broaden it out. Lowe's earnings show that demand is dwindling for home improvement goods as inflation continues to force consumers to cut back on spending. So should we have concerns more broadly about the trajectory for consumption and spending power? Dan Griffith is with us now, Huntington Private Bank Director of Wealth Strategy.
Dan, obviously, as I just mentioned, it's not just DIY. It's a lot of other stuff where consumers are making choices right now. Maybe they're choosing to buy groceries instead of fixing up their house, right? Or they're traveling, whatever it may be. How worried should we be?
DAN GRIFFITH: It's a great question, Julie. Brad, thank you for having me. Really glad to be here. I think what we're seeing is maybe something that was a rotation that started before COVID and continues today, and that is people are buying fewer things and more experiences. And so what's interesting to see is some weakness in some consumer numbers.
For example, we see, as you mentioned before, Lowe's coming in with numbers that are a little bit lower. But Dick's, for example, just reported and reported a little bit higher. And people saying, I want to do more experiential kind of thinking. And so if you look at the consumer side of spending when it comes to goods, maybe we're about a little bit lower. But on the service side, we think those numbers are going to continue to be a little bit stronger too. Obviously, we're always looking at consumer spending as a number to think about overall.
- And so for consumers right now and what we're hearing in terms of the relationship with the Home Depot, with Lowe's, and the decline in DIY, what does that signal about how the consumer is thinking about projects that they're taking on right now, where they might just say, hey, we have to put those off for at least this interim period.
DAN GRIFFITH: I think as I mentioned before, we're watching consumer confidence very closely. It's kind of interesting when that University of Michigan number comes out. Now people are looking at almost like an unemployment number, looking at it more closely than maybe we ever have in the past. So it's always been important but even more important now.
And I think that's part of what consumers are doing, right? Looking around and saying if I can hold back on a project, I might just wait a little bit. It doesn't mean that they don't have the capacity to do it. We see that the spending numbers are up. Obviously, consumer debt is up a little bit. But overall, that consumer debt number is still historically pretty low and healthy. And we're also seeing savings rates go up as well.
So I think consumers have the ability to do some of that but just kind of mentally, they're saying let's be a little more prudent, wait and see what happens overall. People got big raises over the last couple of years. I think a lot of them will be looking around to say, how big is my raise going to be this year? And maybe that'll be part of what helps them to make that decision.
- Right. And in real terms, how big is my raise when you adjust for inflation? How is all of this feeding through to your strategy for clients? Are you avoiding consumer recessionary stocks? Is that something where if you're seeing declines, that you're looking at those?
DAN GRIFFITH: I think part of it is choosing what inside the consumer discretionary environment makes the most sense. And so again, looking at consumer discretionary as it relates to experiences or services and thinking, hey, that's probably a stronger strategy. And maybe looking at some of those individual tasks or items and saying, we're probably not going to lean into those quite as heavily. It's not going to be as beneficial.
- What does a savings rate kind of normalization look like? In other words, if consumers are now saying to themselves, yeah, we have our raise, but to Julie's point, we have to adjust that for inflation as well. And then think about, OK, even if we're not going out and spending that at the same kind of cadence as we were when there was a little bit more FoMO in the mix, now it's a question of, OK, what does that normalization over time look like even as they're kind of bracing for what has been deemed a Q3 2023 expected recession?
DAN GRIFFITH: I think that the consumer savings rate is going to be directly correlated to how the consumer feels. And so if the consumer feels better, if the consumer looks around and says, hey, I've got enough in the bank that I feel comfortable making larger expenditures, then that's what we can look for. Of course, we don't know what that looks like, right? We think consumers now have probably a higher debt tolerance than they did. We see that in the consumer debt numbers. But overall, I don't know that there is a magic number there. It's just kind of what makes people feel better too.
- I'm also curious, and I'm always curious when we talk to you because you are in Ohio, right?
DAN GRIFFITH: That's right.
- We talk to New York people a lot. So when you talk to clients, give us sort of a temperature on how people are feeling right now, especially since I'm sure many of your clients or business owners who are in a particular credit environment, et cetera.
DAN GRIFFITH: Huntington Private Bank is based in the Midwest, and we have a lot of wonderful clients throughout the country, but obviously, our core is there. And we're heavy industrial, which I think makes a big difference, probably larger exposure. I think for our middle market clients, they're feeling more confident than many of the publicly traded companies that are out there.
Earlier obviously, in the week we've heard a lot more about concerns from the fed relative to middle market debt, and who's borrowing, and how that's going to work. I think a lot of our clients are saying we're able to borrow, and a lot of our clients are. We're not turning away borrowing because we don't have creditworthy clients. We're not turning away borrowing. They're asking not to borrow because they, again, want to take a little bit of a pause and see what's there.
So a lot of our business owners are still very confident but prudent, I think, about the future. Making sure they can move forward in ways that are going to be sustainable longer term. I hate to use the phrase new normal, but I think a lot of them have kind of gotten used to that a little bit.