Home Depot's Earnings Boost Home Improvement Sector

When Home Depot recently reported better-than-expected earnings, it provided a glimmer of hope for the struggling home improvement sector. However, it remains to be seen whether Lowe's, whose earnings will be released on Tuesday morning, will experience a similar outcome.

Home Depot's strong performance in the second quarter not only exceeded expectations but also prompted analysts to revise their stock price targets. Evercore ISI analyst Greg Melich stated, "Home Depot's solid 2Q beat raises hopes that the worst of 2023's Home Improvement downturn is behind us." This positive sentiment is supported by data from Placer.ai, showing that foot traffic at both Lowe's and Home Depot has improved over the summer compared to last year, despite still being lower overall.

However, even with this optimistic outlook for the home improvement sector in the latter half of the year, it does not directly impact Lowe's second-quarter results. In fact, analysts have actually lowered their earnings estimates for Lowe's after the company revised its forecasts in May. The uncertainty surrounding the sector, further exacerbated by Home Depot's recent comments suggesting consumer hesitancy in making significant purchases, has led to additional downward revisions in recent weeks.

As Lowe's prepares to release its earnings report, analysts are now expecting adjusted earnings of $4.47 per share, slightly lower than the consensus call of $4.49 at the end of July. Revenue estimates of $25 billion have remained relatively unchanged.

It remains to be seen whether Lowe's will surprise the market with its results or align with the subdued expectations set by analysts. However, Home Depot's better-than-feared earnings offer a glimmer of hope for the home improvement sector's recovery.

Home Improvement Sector Faces Challenges

The housing market's lack of activity has put significant pressure on the home improvement sector. With higher mortgage rates dissuading potential buyers, renovation projects that typically follow a home purchase are also being impacted. In addition to this, inflation and an unseasonably cold spring further dampen interest in do-it-yourself projects.

Lowe's Struggles with Dependence on DIY

This situation is particularly worrisome for Lowe's, as approximately 75% of its revenue comes from the do-it-yourself segment. In contrast, Home Depot saw a boost in sales this quarter due to improvements in West Coast sales and increased business from professional builders—areas where Lowe's has less exposure. Home Depot's annual sales heavily rely on its Pro business, which accounts for about half of its revenue. In contrast, Lowe's caters to contractors and relies on them for around a quarter of its annual sales.

Possibilities for Lowe's Growth

However, Lowe's has been working on expanding its business with contractors and targeting new demographics, such as rural communities. Initial indications show that these investments are paying off, as previously reported. Pro sales made up 19% of Lowe's annual sales in 2019 and have now increased to approximately 25%. Moreover, although Lowe's lagged behind Home Depot in foot traffic from March to June, it managed to catch up in July based on data from Placer.ai.

Financial Performance and Market Comparison

Lowe's stock witnessed a 0.8% decrease in value on Monday. However, it has still gained 9.2% this year, outpacing Home Depot's 2.6% growth but falling behind the broader market.