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Home Improvement Retailers Are Up To Bat

Daniel Laboe

Retail earnings week is in full swing and the home improvement retail duopoly is up to bat. Home Depot (HD), the largest home improvement retailer in the world, released its July quarter earnings this morning. The results were mixed, and forward guidance was negative, but traders and investors were ostensibly pleased, with HD rallying over 4% in morning trading. Lowe’s (LOW) shares are up almost 4% as investors gain optimism going into tomorrow mornings Q2 report.

Lowe’s missed big on earnings in Q1 causing the share price to plummet more than 17% in the week following the release. Lowe’s appeared to be struggling with cost pressures that analysts anticipate persisting for the remainder of the year. Guidance was lowered for the year, with retracting margins expected. Lowe’s analysts have lowered their EPS estimates for the remainder of this year and next.

Lowe’s analysts are estimating a $2.00 EPS on $20.98 billion in sales, which would represent 3.4% earnings decline and less than 1% revenue appreciation.

LOW has struggled to recover from its Q1 results, with share prices only 6.5% for the year (most of that gain being realized in todays trading). Look for margin expansion in Q2 guidance to be the key catalyst of a LOW rally, along with any upward revisions to guidance.

Lowe's Companies, Inc. Price, Consensus and EPS Surprise

Lowe's Companies, Inc. Price, Consensus and EPS Surprise

Lowe's Companies, Inc. price-consensus-eps-surprise-chart | Lowe's Companies, Inc. Quote

Home Depot Results       

Home Depot beat EPS estimates but marginally missed on revenues in its July quarter earnings posted this morning. Management guided down full-year sales as the company faces commodity deflation and tariff headwinds. Management estimated a 1-2% impact from the ensuing trade war, which could impact price points and hinder consumer spending if it endures. Timber deflation is also impacting Home Depot’s topline.

Housing renovations are expected to slow as the overall housing market begins to cool down. This will have a negative impact on the firm’s results.

The question that you are likely trying to answer is why HD is up on all the perceivably negative news? I believe that Home Depot’s agile business techniques has allowed the company to weather the category’s headwinds. Home Depot is working closely with suppliers to move production out of China and avoid as much of the tariff burden as possible.

Investors were conservative coming into this earnings report and believed that management would pull guidance down further from all the drawbacks I mentioned above. I believe this rally is merely a small release in investor concern.

Home Depot has been increasing its online presence with more than 9% of purchases done on their online platform. 50% of online orders are picked up in store, saving customers the time it takes to navigate the massive store while being able to pick their home improvement needs up that day.

HD has performed admirably since the beginning of the year outpacing its biggest competitor (LOW) as well as the broader market. HD has rallied roughly 26% since the beginning of this year.

The Home Depot, Inc. Price, Consensus and EPS Surprise

The Home Depot, Inc. Price, Consensus and EPS Surprise

The Home Depot, Inc. price-consensus-eps-surprise-chart | The Home Depot, Inc. Quote

Take Away

Home Depot’s ability to navigate the rocky economic waters thus far in 2019 is a positive sign for the home improvement retail sector. Investors are beginning to price in positive results for Lowe’s imminent earnings tomorrow morning.

Look for Lowe’s management to provide color on how they plan to manage the trade headwinds, anticipated slowing housing market, along with brick-and-mortar consumer spending declines. Margin expansions and upwardly revised management guidance could send LOW to new highs. Continued margin contraction might send LOW even lower.

 

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