Home Depot's Earnings Bring Hope for the Home Improvement Sector

The recent earnings report from Home Depot has generated optimism among investors, suggesting that the challenges faced by the home improvement sector may be coming to an end. However, the upcoming earnings report from Lowe's does not look as promising.

Last week, Home Depot exceeded earning expectations and reaffirmed their financial forecasts for the fiscal year, resulting in a wave of target price increases for their stock. According to Evercore ISI analyst Greg Melich, "Home Depot's strong performance in the second quarter indicates that the worst of the 2023 Home Improvement downturn may be behind us."

Data from Placer.ai supports Melich's assertion, showing that foot traffic to Lowe's and Home Depot has declined compared to last year but has seen improvement throughout the summer.

Although there is a more positive outlook for the home improvement sector in the latter half of the year, this does not directly impact Lowe's second-quarter results, which are about to be announced.

In fact, many analysts have lowered their earnings estimates for Lowe's second quarter after the company revised its forecasts in May. The uncertainty surrounding the home improvement sector, along with comments from Home Depot suggesting that consumers are still reluctant to spend on larger purchases, has led to further downward revisions in recent weeks.

Currently, the consensus estimate for Lowe's adjusted earnings stands at $4.47 per share, slightly lower than the $4.49 consensus estimate at the end of July. Revenue estimates, however, remain largely unchanged at $25 billion.

Overall, while Home Depot's positive earnings have sparked hope for the home improvement sector, it remains to be seen how Lowe's will fare in their upcoming report. Investors and analysts will be closely monitoring the results to gain further insights into the industry's trajectory.

Home Improvement Sector Facing Challenges

The home improvement sector has recently encountered obstacles due to the lack of activity in the housing market. With higher mortgage rates, potential buyers are being sidelined, and this is also impacting renovation projects that typically follow house purchases. Additionally, factors such as inflation and an unseasonably cold spring have contributed to a weakened interest in do-it-yourself projects.

Lowe's Predicament

Lowe's, in particular, faces a significant challenge as approximately 75% of its revenue comes from DIY sales. In contrast, Home Depot has experienced strength in West Coast sales and sales to professional builders - areas where Lowe's has less exposure.

Expanding Customer Base

However, in response to these challenges, Lowe's has been actively serving contractors and expanding its customer base into new demographic groups, including rural communities. Early indications show that these investments are yielding positive results.

Positive Progress

In 2019, Pro sales accounted for 19% of Lowe's annual sales. Presently, they make up around 25% of the company's revenue. Furthermore, while Lowe's foot traffic initially lagged behind Home Depot's from March to June, it caught up in July, as reported by Placer.ai.

Stock Performance

Lowe's stock closed 0.8% lower on Monday. Although the shares have gained 9.2% this year, surpassing Home Depot's 2.6% increase, they have underperformed the broader market.