Home Depot And Lowe’s: A Look At Demographic Factors

The U.S. home improvement industry has been among the biggest beneficiaries of the U.S. economic recovery, with top players Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) posting phenomenal growth in their stock price since 2008 (See Figure 1). While both company fundamentals and macroeconomic outlook, for both companies looks optimistic to suggest further growth for these names, there could be another factor that influences long-term performance for these companies. This factor solely involves demographic trends in the U.S. and in this article, we look at what the demographic composition in the U.S. population is likely to be, and how this could go on to influence prospects for these companies.

Figure 1: Stock price Movements Of Home Depot, Lowe’s and S&P 500, NASDAQ

Let’s start by understanding what the demographic composition will look like ten years hence. According to Census Bureau Data, 2015 is expected to see the highest number of Generation-X population (35 – 55 years), who are expected to constitute approximately 26% of the population, closely followed by the Millennial population (18-34 years) and Baby Boomers (65+ years), constituting approximately 23% and 15% of the population, respectively. Going into 2025, while all three groups are expected to see growth, the fastest rate of growth is expected to be observed in the Baby Boomer population, who from accounting for about 15% of the population in 2015, are expected to grow to about 19% of the population. Now, it is important to note that these estimates account for the resident population in the U.S. If one also includes the immigrant population, demographic projections could tell a very different story. For one, it is straightforward to expect a higher rate of immigration in the Millennial category, since this category could see foreigners settling in the U.S. for education and employment purposes.

Figure 2: U.S. Resident Population Projections, U.S. Census Bureau

Now, let’s understand the home improvement spending trends across the various demographic categories in the U.S.

— BABY BOOMERS: Let’s start with the Baby Boomers. While demand from this group is less likely to come for factors such as aesthetics, it could most definitely come for convenience. In this respect, individuals in this category could undertake more replacement spending that could let them live a comfortable and safe life. This could include purchases in categories such as home security and surveillance, heating and cooling, fire safety, plumbing, electrical, and doors & windows. According to the Joint Center For Housing Studies (JCHS), the number of homeowners in this category is expected to undergo an approximate 35% increase between 2010 and 2020. Even historically, baby boomers have been instrumental in driving home improvement spending, accounting for about 50% of total home improvement spending (See Figure 3). Moreover, this generation is one that predominantly lives in owner-occupied houses and shows the most resistance to relocate. In such a situation, members in this category end up relying on more home improvement projects to make their homes habitable. Since Baby Boomers are, in general, older and wealthier, they often rely less on DIY (Do-It-Yourself) services and more on professional services. Clearly, the rapid increase in Baby Boomer population among U.S. residents could very well prove to be lucrative for the home improvement industry.

— GENERATION-X: Next, let’s move on to Gen-Xers. Presently Gen-X accounts for the majority of the population in the U.S. These individuals are particularly important for the home improvement market since they are at their prime when it comes to home ownership and home improvement spending. Furthermore, this category could also see a higher rate of growth going forward as we add the immigrant population to the current statistics. In this case, going forward, this category could very well account for a larger share of home improvement spending than even Baby Boomers. In fact, the JCHS has shown evidence of this already, where Gen-Xers have consistently gained share between 1995 and 2013 (See Figure 3).  This category could rely on either DIY or professional services, predominantly based on income levels. While higher income earners could opt more for professional services, those in the lower strata could opt for DIY services.

Figure 3: Changing Household Demographics, Joint Centre For Housing Studies Of Harvard University

— MILLENNIALS: Last, but not the least, are the Millennials. Now, the trends observed in this category are very different from what was observed when those that currently comprise Baby Boomers or Gen-Xers were in this age group. For one, this generation has been relatively late to enter the housing market. A big part of this is because members in this category faced the global recession in 2008, which has subjected them to high rates of unemployment, low wage rates in case of employment, and strict mortgage lending standards. In this case, a majority of individuals in this category opt for rented houses or continue to live with their families, which drags down home improvement spending. Furthermore, members in this category have been slower to start families of their own, which is positively correlated with participation in housing markets and home improvement spending. For these reasons and more, the share of millennials in the home improvement market until now has been negligible (See Figure 3).

However, millennials are expected to catch up in terms of their level of participation in housing markets over the next decade, as they increasingly move into a higher age group. This is in anticipation of an increasing number of current millennials improving their financial standing and starting families. Moreover, according to JCHS, millennials are expected to become the largest category in terms of demographic composition driven by high rates of immigration, which is expected to push up those in this category over the projected 86 million by 2025. The mere size of this group, along with an increasing number of them moving into the current age group of Gen-Xers could drive home improvement spending over the next decade.

Now, moving on to what all this means for retail conglomerates, Home Depot and Lowe’s. Clearly, these giants are seeing good days of late, both in terms of their business performance and macroeconomic projections. Even in terms of demographics, the current situation is favorable for the industry. However, a brief look at the analysis above suggests that demographic projections are only going to get more favorable for these names. In this case, under upbeat economic conditions, Home Depot and Lowe’s could have plenty to gain, going forward.

We have a price estimate of $120 for Home Depot’s stock, which is above the current market price.

Our complete analysis for Home Depot’s stock

We have a price estimate of $78 for Lowe’s stock, which is above the current market price.

See our complete analysis of Lowe’s here

Sources:

1. Improving America’s Housing – Emerging Trends in the Remodelling Market
2. State Of The Nation’s Housing 2015
3. Aging In Place: Implications For Remodeling
4. Population Projections, U.S. Census Bureau

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