Home Depot, Lowe's under pressure as housing recovery, lumber prices muddy outlook
The home improvement market is bracing for a bumpy road.
Two of the largest home improvement retailers, Home Depot (HD) and Lowe's (LOW), warned of softness in the market in recent earnings reports, indicating the year ahead is likely to be a difficult one as inflation weighs on consumers.
"In 2023, residential investment will be under some pressure, given elevated levels of inflation, higher interest rates and a more cautious consumer," Lowe’s CFO Brandon Sink told analysts on the earnings call on Wednesday. "We are forecasting a slight decline in the home-improvement market."
"We do expect moderation in home improvement demand," Home Depot CEO Ted Decker told analysts on the company's earnings conference call last week. "People are also starting to shift spend more towards services. And as we've said, we see some more price sensitivity," he added.
The caution comes as Lowe's (LOW) posted a mixed quarter on Wednesday before the market open.
The retailer reported adjusted earnings per share of $2.28, topping above analysts expectations for $2.21. Revenue missed estimates, coming in at $22.4 billion against expectations for $22.7 billion, according to data compiled by Bloomberg.
Comparable-store sales at Lowe's were down 0.7% for the fourth quarter, which ended February 3. That followed Home Depot's 0.3% drop in comparable sales for the fourth quarter, the company reported February 21.
"The slower start to the quarter was due in part to slower gift shopping demand during the holiday season, roughly one-third of product mix is discretionary in nature," Bobby Griffin, an analyst at Raymond James, wrote in a note to clients following the results.
For 2023, Lowe's is forecasting sales to be between $88-$90 billion, while same-store-sales are estimated to be flat or down 2% for the year. Executives see the pullback in DIY demand as transitory, and other experts in the industry see a "historic boom" coming for home remodeling.
"Disposable personal income, which I mentioned, is roughly $1.5 trillion in savings above pre-pandemic levels," CEO Marvin Ellison told analysts on the earnings call.
Ellison noted the average equity for homes in the U.S. is about $330,000, and expectations of aging housing stock could point to continued demand for home upgrades.
"Two-thirds of everything we sell is non discretionary. And there are other tailwinds, millennial household formation trend, baby boomers aging in place and more widespread sustainable remote work, so all of these things give us some confidence that the backdrop remains supportive," Ellison added.
Shares of both Home Depot and Lowe’s are down over 10% in the last month.
Lumber deflation
The days of pricier lumber may be over.
The housing slump has triggered a crisis in lumber, with lumber futures falling 70% within the past year. And homebuilders are taking notice.
Pulte Group (PHM) announced in their latest earnings call the company is picking up their pace of construction amid increased lumber stock and more affordable pricing.
A note from analysts at UBS published last month said some experts in the homebuilding space see kitchen cabinetry and windows, rather than larger framing or roofing projects, driving demand for lumber.
And though lumber prices have fallen sharply, the firm noted for many "core" housing products prices "have reverted to 'reasonable levels,' but [builders] are not witnessing any real price reductions from vendors."
As one expert told the firm, most products are "never going [to] pre-Covid prices again."
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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