Are Home Depot and Lowe’s about to hit a sales wall?

Discussion
Photo: The Home Depot
Aug 23, 2021

A recent softening in the red-hot housing market and a reduction in homeowners tackling DIY projects has raised concerns about near-term growth rates for Home Depot and Lowe’s.

Second-quarter sales fell short of analyst targets at Home Depot.

Craig Menear, CEO, told analysts that sales had shifted toward more weekday and less weekend sales, a trend the chain attributed to consumers returning to travel and other recreational activities.

Customers have also become “more comfortable taking on larger projects” as evidenced by sales in its “Pro Customer” segment, which includes electricians, plumbers and painters, outpacing those of DIY customers for the second straight quarter.

The comp gains in the latest quarter were led by kitchen and bath and lumber. The chain saw negative comps in categories such as paint, hardware and indoor/outdoor garden that had been strongest a year ago as stuck-at-home Americans first started splurging on home upgrades, including setting up work offices.

Richard McPhail, EVP and CFO, nonetheless said the fact that home prices are up over 20 percent from two years ago should nonetheless drive further repairing and remodeling investments. “As we look forward, not only have we seen that home price appreciation, but the homeowner balance sheet is incredibly healthy,” he said. “The state of mortgage finance is incredibly healthy. And so, that’s some of the reasons why we’re optimistic.”

Lowe’s second-quarter sales topped expectations as strengthening in professional sales offset DIY declines. Strong comps across kitchen and bath, flooring, appliances and decor came on top of 20 percent growth in those categories last year.

Marvin Ellison, CEO, likewise said home price appreciation and historically low mortgage rates supports a “very positive” outlook for residential investment. He further noted that the near-term housing turnover pressures aren’t related to supply.

“Our research shows that it will take years for the supply of homes to meet the projected demand. This remains a very positive indicator for home improvement,” said Mr. Ellison. “In addition, the customers’ mindset regarding their home is very straightforward. As long as their home is increasing in value, they see upgrades and enhancements to their home as an investment and not an expense.”

DISCUSSION QUESTIONS: Do you see near-term sales pressures for home improvement chains as the U.S. economy opens up? Are you any more or less confident that home improvement chains will gain a long-term boost as a result of the pandemic?

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"Home improvement chains will thrive, especially if the Delta variant gains strength and forces us to cocoon again."
"...all those shovel-ready projects start with someone buying a shovel."
"The continued demand to evolve the home office and the increased cost of homes will contribute to strong consumer demand for several years."

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23 Comments on "Are Home Depot and Lowe’s about to hit a sales wall?"


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Mark Ryski
BrainTrust

Overall, I’m optimistic about the DIY category. Despite very difficult year-over-year comparisons driven by an over-heated DIY market when the pandemic first hit, the category is still performing very well and its prospects for the near term look very solid too. Unfortunately, the pandemic is still part of the discussion, and it appears that work from home is here to stay in some way indefinitely, so I suspect that the DIY category will continue to perform well in the near to mid-term.

David Naumann
BrainTrust

You are correct that “the pandemic is still part of the discussion.” I know that in some areas or respects people think “the economy is open,” but the reality is that with the Delta variant, we may be in for some unpleasant social distancing and economic surprises.

David Naumann
BrainTrust

The pandemic caused many people to look at their home differently. Spending more time at home working and going out less, including less travel, has inspired consumers to view their home as a retreat. This new perspective on the role of their homes was the catalyst for home improvement projects and while there may have been a recent decline in DIY projects, the long-term trend looks good for home improvement stores. The pandemic may be around for a long time and our habits have changed for the long-term.

Neil Saunders
BrainTrust

Spending on home improvement soared to unparalleled heights early in the pandemic and consequently growth at Home Depot and Lowe’s rose very rapidly. It’s a matter of logic that growth could never continue at those heightened rates and that has been reflected in the recent numbers of the home improvement giants. That said, spending is still elevated over pre-pandemic levels and is likely to remain so, if only because of wider macro shifts such as people working from home more. What’s also interesting is the drop back is more a function of consumers spending less, whereas the professional part of the market is still growing thanks to a backlog of trade jobs and a robust construction market. That is the near-term battleground for the giants.

Nikki Baird
BrainTrust

I think there is a lot of pent-up demand for home improvement projects still, some of which has been held off by sky-high lumber prices that are starting to come back down. So I agree that there is still a lot of upside ahead.

However it will be interesting to see how the market reacts to these companies that had outsize gains during the pandemic and how that impacts how they fare in the market when they inevitably come off of those highs. Theoretically the markets price in that this was a temporary surge, but then, the markets are not always rational…

Dick Seesel
BrainTrust

As with most retailers reporting sales comparisons to 2020, the more relevant benchmark is 2019. This may signify a longer-term sales trend at the big box DIY retailers, even if the immediate comps are challenging.

I believe there is still a lot of runway for the home improvement business generally and DIY retailers in particular. Many consumers have just recently decided on remodeling projects after staring at those four walls for a year, and many contractors are backed up for months because of demand and supply chain issues.

Lisa Goller
BrainTrust

Home improvement chains will thrive, especially if the Delta variant gains strength and forces us to cocoon again. As our homes now serve multiple uses, more of us seek extra space and furnishings for virtual work, school and home gyms.

Given the long wait times for home improvement projects, I expect a long-term boost for these retailers.

Paula Rosenblum
BrainTrust

Well, there are two different questions here: Do I see DIY projects falling as people start going back out again? Yes. Do I see the home improvement market in trouble any time soon? No. Not as long as housing prices remain crazy. People are just going back to hiring people to do things for them (at a decent wage!).

Jeff Sward
BrainTrust

The slowdown in sales was entirely predictable, and probably was predicted by the retailers themselves. So now it’s about the mix of business — pro craftsman vs. the amateur homeowner. The homeowner might slow down a little, but the heightened importance of the home will keep both camps busy for the foreseeable future. It’s not like they are struggling to reach pre-pandemic levels of spending.

David Spear
BrainTrust

I’m still very bullish on homeowner projects well into 2022. If my neighborhood is any barometer, there are many home upgrade projects underway or about to commence, including one in my home. So will DIY sales hit a wall? From a year-over-year standpoint, it’s going to be tough for both Lowe’s and Home Depot to beat last year’s record breaking increases, but the underlying fundamentals of pent-up demand to improve homes with small to medium sized projects is still – in my opinion – quite robust. The wildcard will be energy disruption. If we have a major energy issue, then we’ll see skyrocketing prices and a significant pullback on home projects.

Dave Bruno
BrainTrust

Bumping up against those 2020 comps was always going to be painful, but I doubt even a “slowing” of the real estate market is anywhere near enough headwind to prevent strong performances in DIY retail for the foreseeable future. People look at their homes differently now, and will continue to invest and transform them, whether doing it themselves or with the help of tradespeople, and The Home Depot and Lowe’s will be there to help them all every step of the way.

Liza Amlani
BrainTrust

Home improvement chains will continue to grow although this is the time to shake things up. Innovation in material development, sustainable product assortments and partnerships with DTC, BIPOC, local brands in home decor will keep DIY retail relevant.

Perry Kramer
BrainTrust

The largest challenge DIY has right now is evolving the product mix to meet demand and keeping their supply chain full. If they can keep the products that consumers want in stock they will continue to see sales growth and some loyalty. The continued demand to evolve the home office and the increased cost of homes will contribute to strong consumer demand for several years. COVID-19 was a significant catalyst for the way that people see investing in their homes now that they spend more time in them.

Ryan Mathews
BrainTrust

I do see those pressures easing up, but I also feel the current performance numbers are distorted. For example, true, comp sales in lumber are strong but the price of lumber has exploded so the comps may still reflect a loss of volume camouflaged by radical price hikes. That said, housing stock is in short supply in many parts of the country driving overly high valuations and purchase prices and keeping lots of people out of the housing market. Some percentage of that housing is off the market because of legislation prohibiting evictions. Once that expires there will be many more houses on the market. The bubble should, if not burst, substantially deflate, people will start buying again and remodeling new homes or homes going on the market. As to whether this will be a “long term boost,” it’s at best always a cyclical market so “long term” it will continue to rise and fall.

Peter Charness
BrainTrust

Unless someone is doing market surveys, it’s all conjecture and opinion. As Dave rightly pointed out — comps on spikes are hard to match. It stands to reason though that with more money flowing into the economy (both government and wage growth), and the cost of projects coming back down (wood prices lowering) sustained growth is likely. I mean all those shovel-ready projects start with someone buying a shovel.

Mel Kleiman
BrainTrust

Am I selling my Home Depot stock? The answer is NO. If you look at all of the fundamentals it may not be a great buy at this point but it is sure a great stock to hold. Demand for new and remodel is still booming and when the supply chain can loosen up a little more the boom is just going to get bigger.

Ananda Chakravarty
BrainTrust

Construction is rolling up their fantastic spring and summer. Typically we see a seasonal drop in sales during the colder months for both DIY and construction. This is part of the normal cycle. More interesting is that building materials pricing, especially lumber, is on a downtrend right now – with lower cost lumber which should be coming to the big box stores soon. As for a long term boost, there will be a shift from commercial office to home office, but the costs will still exist. If anything, there will be far more home offices and the commercial scale advantage will vanish pushing more dollars into residential office space purchasing. Larger purchases for construction at the big box stores will give way to smaller contractors.

W. Frank Dell II
BrainTrust

A couple of factors will drive near term sales. First, the median price for a house has increased from $316,000 to $360,000 in one year. Here higher market entry will force more DIY sales as these new buyers cannot afford professionals. Second is the never ending COVID-19 lockdown and restrictions. Might as well fix the drain as we have nowhere to go.

Brian Numainville
BrainTrust

This boost will continue into the foreseeable future. Yes, there may be ups and downs, such as seasonal patterns, but given the large scale back-up in contractor availability (20 weeks in several cases in my area) and the desire to make the home more of a center of activity for many, there is plenty of runway left.

Andrew Blatherwick
BrainTrust

The fact that these companies missed the very ambitious analysts forecasts does not mean they are about to see a major downturn in sales. Just possibly the analysts did not understand the market and got it wrong!

It would be impossible for the growth seen during the pandemic to continue as people go back to work and are released from lockdown. The rest of the indicators are still very positive and the ongoing pressure on housing stock means that people will continue to improve their homes and spend money at these retailers for some time to come. Getting carried away on a tide of growth and predicting it to continue is the problem not the underlying strength of the market.

Craig Sundstrom
Guest

I may be wrong, of course, but I don’t really see a lot of connection between home price increases and DIY sales; at least not directly. Like any other business, there’s a connection to the general economy, and since many — most? — of their sales are actually to contractors, as opposed to DIYers, I can see a downside to a decline in new home construction. But at the moment, this sounds like a “concern” seeking a cause.

Doug Garnett
BrainTrust

Home Depot’s struggle while Lowe’s excels at this point in time is no surprise — Depot is more heavily dependent on the contractor market. Lowe’s and Depot’s results are usually a counterpoint — one is excelling while the other struggles (and vice versa). When consumer sales outpace pro sales, Lowe’s does better. When it’s the opposite, Depot does better. (Of course, each claims that their operation excellence creates the good times. But history doesn’t tend to agree with that idea.)

One key issue to watch is the tumbling price of lumber. After exorbitant prices all of the past year, this hit my radar this morning: “Unprecedented collapse” in Lumber Prices Forces One Canadian Sawmill to Curb Production.

James Tenser
BrainTrust

Event-driven sales surges are commonly followed by periods of levelling off. That’s not the same thing as “hitting the wall” on sales. I’m generally bullish on the DIY sector. Same for home furnishings. But the sales chart won’t be a straight upward line. It never is.

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Braintrust
"Home improvement chains will thrive, especially if the Delta variant gains strength and forces us to cocoon again."
"...all those shovel-ready projects start with someone buying a shovel."
"The continued demand to evolve the home office and the increased cost of homes will contribute to strong consumer demand for several years."

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