Home Depot Inc (NYSE:HD) chief executive Craig Menear clearly sees the glass half-full.
When addressing the challenges HD faces in attracting millennials, Menear is unfazed by the common argument that younger Americans can’t afford home ownership. That simply means there are more people staying in their residences longer, leading to higher demand for renovations. So far, it’s a tailwind that’s benefited both Home Depot and chief rival Lowe’s Companies, Inc. (NYSE:LOW).
But how long can the good times last?
Attracting Millennials
Undeniably, one of the contributing factors for market success by HD and LOW is their secular industry. Murphy’s law doesn’t wait for bull markets to rear their ugly head. According to data from the U.S. Federal Reserve, personal consumption of non-durable goods — such as clothing or food — has fallen to an all-time low in this decade. In contrast, purchases of durable goods — essentially the inventory of Home Depot and Lowe’s — has jumped sharply from the 2000s.
In other words, American families have found ways to either skimp or save on frequently consumed products.
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That show of strength should be enough to make investors happy come the second quarter earnings next week. However, the long-term picture is somewhat cloudy.
By 2020, American millennials are projected to account for roughly 30% of total retail sales. That amounts to $1.4 trillion on the line. However, millennials also have a tendency of being more frugal than older generations. Thus, getting them to spend will be a bigger challenge than Home Depot and Lowe’s realize.
Yes, younger millennials by default are just entering the workforce and will not have the spending power of those more experienced. Another commonly cited fact is that millennials are typically overburdened with student loan debts. But for Home Depot and Lowe’s, the real issue is something alarmingly mundane.
Quite frankly, we’re a useless bunch.
Author Mark Bauerlein was even less generous with his word choice when he wrote the book “The Dumbest Generation.” Bauerlein argues that the mass proliferation of technology that was to usher in an intellectual renaissance has had an unfortunate side effect: Today, most millennials lack basic life skills. This generation is more inclined to Google a plumber rather than dirty their texting fingers.
Universal Lack of Skills
It’s not just a matter of the “ugly American” stereotype. The reality is that the uselessness of millennials is a global trend.
For example,Daily Mail once bemoaned the dichotomy between technological smarts and blue-collar denseness among British youth. According to a study of 2,000 millennials, eight out of 10 have never changed the oil of a car. Seven out of 10 can’t sew a button. It begs the question, what good will promotions at Home Depot or Lowe’s do when the digital generation doesn’t know what they’re buying?
Youth culture wouldn’t be such a problem for do-it-yourself businesses if it were isolated in the U.S. But as it stands, Home Depot has a substantial presence in Canada and Mexico, as does Lowe’s. Potential plans to expand elsewhere will more than likely be met with the same dilemma.
The issue is hardly theoretical.
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So far this year, Home Depot is up 5%, which is a far cry from the 30% returns it gained in each of the past three years. Lowe’s, up 8%, is also well off the pace of its more recent performances. That’s amid a fantastic year for the broader markets; the S&P 500 is up 7% this year and notching new all-time highs.
Naturally, not every shred of underperformance should be pinned on the millennials. There are other challenges in the underlying economy that will be tricky for any company to tackle.
But for home improvement specialists like HD and LOW, the younger generation is a looming problem that will take more than sales to solve.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
