The home improvement market might have a nice tailwind this year thanks to all the people who moved in 2020 during the pandemic, and Lowe’s and Home Depot remain in position to possibly benefit from the trend.
Home Depot and Lowe’s look to continue sales surge from previous quarters
Real estate firm Zillow (Z) recently reported a great quarter, exceeding the company’s own outlook and sending its shares up by double digits. “Homes are flying off the shelves,” CEO Richard Barton told CNBC in an interview.
Which could be great news for Home Depot (HD) and Lowe’s (LOW) as those two home improvement retailers prepare to issue earnings reports of their own next Tuesday and Wednesday, respectively. What’s good for the goose is good for the gander, the old saying goes, and the booming real estate market has investors optimistic that the home improvement sector can continue to benefit. Home sales rose 5.6% last year to the highest pace since 2006, according to the National Association of Realtors (NAR).
If 2020 was the year it felt like everyone was moving to larger homes for more space where they could hunker down with their families, then 2021 might be the year when those same home buyers look around at the four surrounding walls and start thinking about what they don’t like and how to change it. If that’s the case, HD and LOW are perfectly positioned thanks to all they’ve been doing.
However, both companies will soon be comparing earnings with their 2020 results, which benefited from the pandemic. That means some analysts think further earnings gains might be a bit more limited as 2021 proceeds, a possible reason why shares of both companies are about as flat lately as that kitchen counter you’re planning to install.
LOW has been on the comeback trail as the momentum player the last few quarters, posting several strong earnings results in a row. HD has been more of the rock-solid old hand (see chart below).
Where they both compete heavily is for business from small contractors, the people you hire to build a new bathroom or kitchen. Recognizing that, both stores—HD in particular—have reached out to the on-the-go retail shopper and small contractor with more pick-up and delivery options during the pandemic. For instance, HD recently made it easier for small contractors to park near the stores to ease logistics.
With both companies’ earnings reports, the makeup of sales growth and projections will likely matter to investors. They may tolerate weakness in the “do-it-yourself” category as long as there’s positive news from the professional segment.
The two companies may be benefitting from the same tailwinds, but their stocks haven’t flocked together. LOW is up 43% over the last year, more than double the S&P 500 Index (SPX). HD, however, is up just 14%, trailing the SPX. Of course, it’s not totally an apples-to-apples comparison. HD, with a market-cap of nearly $300 billion, is more than twice the size of LOW. Also, HD has twice the dividend yield of LOW, meaning investors have benefitted in other ways from owning it besides direct market gains. (Though it’s important to note that dividend continuance is never guaranteed).
Last month, HD got an upgrade from a Guggenheim analyst, who said company spending should slow later this year and help margins. Guggenheim also thinks HD might begin to repurchase shares at some point this year. That, along with higher margins, a healthy housing market, and success with consumers it attracted during the pandemic, leaves the analyst confident about Home Depot “re-establishing the path to high-single-digit EPS growth,” Barron’s reported.
HD hasn’t stood still. Last November, it announced an agreement to acquire HD Supply Holdings, Inc., a leading national distributor of maintenance, repair and operations (MRO) products in the multifamily and hospitality end markets. At the time, HD said it expected the $8 billion acquisition to accelerate sales growth and be accretive to earnings in fiscal 2021. Analysts say this positions HD well in a $55 billion market. Listen for potential updates on this deal during HD’s call.
It’s also potentially a shot across the bow at LOW, which is also trying to position itself in the so-called “professionals” market, meaning those small contractors we talked about earlier, not just do-it-yourselfers.
HD had an amazing Q3, with sales up 24%, but the stock sagged lately. Some analysts worry that HD (and, to some extent, LOW) won’t be able to sustain 2020 levels of growth once the pandemic recedes. One thing investors may want to listen for on the calls is what executives have to say about the rest of the year. HD has shied away from providing a full-year outlook, at least so far. Will that change?
Another thing HD investors are watching is expenses. The company charged ahead as a good corporate citizen last time out, announcing that some of the temporary employee compensation programs it started during the pandemic will become permanent wage increases. That means around $1 billion in additional expenses per year. It’s hard to fault a company for supporting its employees during these tough times—in fact, it’s worth a salute. But in dollars and cents terms, that might be one factor taking a small bite out of earnings growth.
Last time out, LOW delivered a slight disappointment with Q3 earnings. Its outlook came in a little short of Wall Street analysts’ expectations, hurt by higher costs and rising expenses in its e-commerce platform.
Same-store sales did rise 30% year-over-year for LOW in Q3, so that could be a level to watch in Q4 to see if the momentum carried over. There was no sign of a slowdown in the housing market at the end of last year, which is why some analysts remain optimistic that LOW and HD could report strong sales growth again in their Q4 results.
Another thing to listen and look for when the companies report is how their executives see things playing out if there’s another government stimulus. Political chatter in Washington is that a $1.9 trillion stimulus, which would include $1,400 checks to many Americans, is likely to pass Congress and be signed by President Biden next month. A stimulus that sent $600 checks took effect in December, and January U.S. retail sales jumped 5.3%. So evidently, those checks are getting spent. More checks to consumers could potentially wind up being more money in the bank for retailers like HD and LOW.
The equation gets even better if the economy continues to recover from Covid. One near-term worry, however, is how the frigid February weather across much of the U.S. might affect sales for big retailers. Early indications point to a bit of a slowdown, especially in states like Texas that were hard hit by the storms and not used to digging out of snow.
Of course, if the snow and ice damaged homes, that’s another potential opportunity for the home improvement business. Remember that other old saying: “’Tis an ill wind that blows no one some good.”
All the best,Shawn @ShawnCruz_TDA
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