Monthly Reviews On The Home Improvement Sector: Home Depot And Lowe’s

As both Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) reported their third quarter results last month, we discuss the home improvement market. As expected, following weak consumer demand in the early part of the year due to an unusually cold winter, demand for home improvement goods and equipment picked up in the U.S. during the third quarter. But what underscored the strength in Home Depot’s business was the strong rise in sales in Q3, despite the data breach during the quarter. Home Depot maintained its year-end outlook on sales growth of 4.8%, after a 5.4% year-over-year rise in revenues in Q3. On the other hand, for the first time in over two years, Lowe’s comps stood almost near to that of Home Depot’s. This strong growth momentum for both Home Depot and Lowe’s could continue into the fourth quarter, ending January 2015, on the back of Black Friday and holiday sales, and improving economic conditions in the U.S.

We look at recent trends that could bolster growth in both Home Depot’s and Lowe’s sales in the near term.

Accelerating New And Existing Home Sales:

Home improvement retailers are impacted by the number of house sales, as new occupants spend on home improvement supplies and construction products and services. Following the first quarter, house sales have picked up in the U.S., with existing home sales reaching a seasonally adjusted annual rate (SAAR) of 5.26 million in October, the highest sales figure in over a year, and also higher than the overall adjusted figure of 5.07 million for 2013. ^[1] New home sales also rose to a SAAR of 467,000 in September, the highest in over a year. Increases in new and existing house purchases in the last few months should boost home improvement sales going forward, as new occupants look to furbish their homes.

We have a price estimate of $93 for Home Depot’s stock, which is about 6% below the current market price. The stock has grown by less than 1% in the last month.

Our complete analysis for Home Depot’s stock

Another statistic that augurs well for the U.S. housing industry, and in turn for the home improvement market, is the rising builders’ confidence index, which rose to a seasonally adjusted level of 58 last month, up from 54 in October. ^[2] The gauge of home-builder sentiment had increased to 59 in September, the highest since November 2005. A reading over 50 is considered a sign of belief among builders that new home sales will rise going forward.

Unemployment Rate Continues To Drop:

Following a negative 2.1% contraction in the U.S. GDP in Q1, the country’s GDP returned to positive growth in the second and third quarters, increasing by 4.6% and 3.5% respectively. ^[3] In particular, the recent job growth, that saw the unemployment rate drop to below 6% in September, fueled a rise in consumer spending by 1.8% in Q3. ^[4] The unemployment rate further fell to a six-year low of 5.8% in October. This bodes well for the housing industry as job creation would facilitate income growth and consequently also support home sales. In addition, customers with new jobs, flush with cash, could look to take-up home improvement projects, boosting sales for Home Depot and Lowe’s.

Mortgage Rates Remain Low As Of Now:

According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage remained around 4% last month, and is below the January levels of 4.5%. ^[5] Potential home buyers have looked to take advantage of the lowered borrowing costs, boosting home sales. Lending rates are expected to rise going forward, fueled by the Federal Reserve’s announcement of reduction in bond purchases, which had kept the long-term interest rates low. ^[6] The rates haven’t risen as aggressively as they did mid-last year when the Fed first announced a reduction in bond purchases. However, the average rate for a 30-year fixed-rate mortgage is expected to rise to 5.1% by the end of 2015, which could further prompt house purchases in the near term, consequently boosting home improvement sales.

We have a $55 Trefis price estimate for Lowe’s stock, which is roughly 12% below the current market price. The stock has grown by 10% in the last month.

See our complete analysis of Lowe’s here

Online Black Friday Sales Rise:

Although the estimated number of holiday shoppers (both online and in-store) declined to 55.1% this year from 58.7% in 2013 during the Thanksgiving weekend, online sales are estimated to have risen by 32% on Thanksgiving and by 26% on Black Friday. Both Home Depot and Lowe’s have focused on their online sales, which are growing faster than the overall comparable sales growth at the retailers. The expected surge in demand during the holiday season is expected to boost home improvement sales this month. According to a survey by the National Retail Federation, one in five customers purchased home furnishing items during the weekend. ^[7] In addition, the drop in customer traffic during the Thanksgiving weekend reflects decreasing customer dependency on holiday discounts and promotions. With a rising number of jobs and increasing disposable incomes, customer spending could remain strong throughout the year, boosting sales and profits for retailers even with no discounts or price cuts.

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1. “New and existing home sales, U.S.“, National Association of Home Builders [↩]
2. U.S. home builder confidence rose in November [↩]
3. U.S. GDP growth rate [↩]
4. U.S. unemployment data [↩]
5. 30-year fixed-rate mortgages since 1971 [↩]
6. historical 30-year fixed-rate [↩]
7. National retail federation data [↩]