The pandemic turned everyone into homebodies. Whether it was a major project like moving or remodeling, or just getting some better lighting for the new home office, home-improvement retailers reaped the benefits of our nesting lifestyles.
Now the Covid-19 virus may still be with us, but those retailers’ stock gains have vanished, like hand sanitizer from a drugstore shelf. Their upcoming earnings reports are a chance to get back on track.
(ticker: HD) and
) will report earnings on Tuesday and Wednesday, respectively. While analysts love the stocks—more than 70% of those who cover them are bullish going into results—the market has soured on these pandemic winners, which have declined by double-digit percentages so far this year.
That drop might be a little premature. Certainly the housing market has been booming for nearly two years, but that doesn’t mean it can’t keep climbing—as Barron’s argued in its take on home builders at the end of 2021—given a host of factors bolstering demand.
While rising interest rates are something to watch, housing remains strong, with lean inventory and turnover above prepandemic rates, even if home sales have slowed from white-hot levels. “[F]avorable demographic trends (millennial homeownership) and flexible work options remain supportive of continued strength in household formation,” noted Baird analyst Peter Benedict earlier this week.
While housing starts fell in January, according to data out Thursday, Comerica Bank Chief Economist Bill Adams attributes much of that to an unseasonably cold winter. “The backlog of housing units permitted but not started is at an historic high, a measure of how supply-constrained the housing market is,” he writes, and while supply-chain problems should ease this year, labor shortages will likely continue to weigh on new-home supply, keeping prices high and motivating existing homeowners to list properties.
So why the selloff? Part of it is the general market’s decline, as all three major indexes are in the red for 2022. In addition, Lowe’s December update provided a self-described conservative outlook that missed consensus estimates. Recent data from suppliers such as
(WHR) have been mixed. And worries about inflation have cast a pall over many retail names. All these could prove to be headwinds in the upcoming reports.
Yet even as the pace of upward revisions have slowed in 2022, more analysts have been taking their earnings estimates higher rather than lower this month and last. Consensus estimates now call for Home Depot to earn $3.18 a share on revenue of $34.9 billion for the quarter, and for Lowe’s to earn $1.71 a share on revenue of $20.9 billion. That equates to top- and bottom-line growth for both companies year over year, despite tough comparisons from a blockbuster 2020.
Indeed, even as the world has opened up, the idea of home as sanctuary hasn’t disappeared. Gordon Haskett analyst Chuck Grom says his firm’s proprietary research shows that consumer intentions for home improvement have remained robust. “Is it as hot as it was? Maybe not, but it still seems very elevated.”
No one could reasonably expect any retailer to match the huge surges they saw during the height of the pandemic. Yet Home Depot and Lowe’s may be holding up better than critics expect. According to foot traffic data from Placer.ai, monthly visits to both have been consistently up every month for the past seven months on a two-year basis—meaning that even if foot traffic is down from the 2020 frenzy, it’s still above prepandemic levels.
Still, given major uncertainties at the moment—from inflation to supply-chain constraints, rising rates, and wobbly consumer confidence—the companies may feel it prudent to stay cautious in their tones when they release results. Such comments could weigh on the shares, even if a better scenario ultimately plays out.
Write to Teresa Rivas at [email protected]