The Week That Was: Home Depot And Lowe’s

While the two largest home improvement retailers in the U.S. have been encouraged by growth trends in the housing sector lately, recent news of massive data breach and security threats cast a shadow over future customer transactions. Home Depot (NYSE:HD) was the latest in the chain of large companies under cyber attack targeted at their payment terminals, when the retailer announced at the start of the month that a security breach might have left large volumes of customer credit/debit card data exposed. Home Depot’s stock fell just after the news surfaced, and the company now faces additional costs of security restoration and recuperation.

On the other hand, while some might believe this news could boost Home Depot’s chief rival Lowe’s‘ (NYSE:LOW) business by driving consumer traffic to the latter, security breaches are a threat to Lowe’s as well. Consumer sentiment has been hit by the Home Depot data breach, and could also translate into lower credit transactions for Lowe’s.

Below we discuss key events from last week in relation to the home improvement retailers in discussion.

Home Depot

The largest U.S. home improvement retailer announced last week that around 56 million customer cards might have been compromised in a cyber attack on its payment systems, lasting about five months. ^[1] In fact, this breach is even bigger than the large-scale personal and credit card information theft at Target last year, affecting about 40 million credit and debit cards. While the stock has rebounded this week, growing by more than the overall S&P Index, the negative impact on consumer sentiment could last longer. Home Depot has said that around $62 million could be needed to cover the investigation, credit monitoring service, call center staffing and other steps in the aftermath of the breach, slightly offset by the expected insurance reimbursement of around $27 million.

We have a Trefis price estimate of $92.65 for Home Depot’s stock, which is roughly in line with the current market price. The stock price rose 3.23% in the last five days.

Our complete analysis for Home Depot’s stock

However, the impact of the recent security mishap on Home Depot’s business could go beyond these “repair” costs and lower future sales. Although the retailer has said that the malware has been removed from its systems, and an allegedly safer encryption system has been employed, the damage to customer sentiment might dissuade them from making credit purchases in the near term. In particular, large ticket purchases, which generally are made through credit/debit cards might go down. This could affect Home Depot’s top line and drag it below the targeted 4.8% year-over-year increase this fiscal year ending January 2015. The retailer, which operates 1,977 stores in the U.S. (87.2% of its overall number of stores), improved its net sales in the first half of this fiscal year by 4.4%.

Lowe’s

Lowe’s might not be a huge benefactor of the recent massive security breach at Home Depot. Consumers might be wary of making credit purchases at the retailer as well, due to an assumed lingering threat of a potential data theft. However, the impact of this news is expected to be milder for Lowe’s, as compared to Home Depot, and the former might be able to gain from the strengthening momentum in the domestic housing industry. Existing home sales rose to a seasonally adjusted annual rate (SAAR) of 5.15 million in July, the highest figure this year, and since September last year. ^[2] On the other hand, builders’ sentiment increased to the highest level since November 2005 in September, on belief of potential rises in home buyers. ^[3]

We have a $52.30 Trefis price estimate for Lowe’s stock, which is roughly 3% below the current market price. The stock rose 2% in the last five days and hit a 52-week high of $54.3 this week.

See our complete analysis of Lowe’s here

Growing momentum in the housing industry, bolstered by declining unemployment rates, could boost Lowe’s results this year. The retailer aims to improve its top line, which grew by roughly 4.2% in the first half of this fiscal year, by 4.5% in the full year. Although rising house sales could mean growth for Lowe’s’ business, as new occupants spend on home improvement supplies and construction products and services, the recent security threat might prompt consumers to stay away from large ticket credit purchases at Lowe’s as well. This could be detrimental to the retailer’s business, due to its focus on higher priced premium products, which often require payment on credit. The average ticket size in last quarter stood at $65.65 for Lowe’s, whereas the figure for Home Depot was $58.43.

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1. Home Depot breach bigger than Target’s, wsj.com [↩]
2. “New and existing home sales, U.S.“, National Association of Home Builders [↩]
3. Builders believe, eyeonhousing.org [↩]