Home Improvement Retailers Face Tough Year

Home Depot and Lowe’s both experienced challenging times in the last months of 2023. As Home Depot's earnings reflect the struggle, analysts are now looking at Lowe's impending report.

Lowe’s Fourth Quarter Earnings Report

Lowe’s is set to announce its fourth-quarter earnings before the market opens on Tuesday. Analysts are estimating adjusted earnings of $1.68 per share on $18.5 billion in revenue. However, there is a projection of a 7% decline in same-store sales.

Analyst Predictions and Concerns

Citi analyst Steven Zaccone anticipates that Lowe’s results will align with estimates. An issue comes to light as weak foot traffic data increases the possibility of missing same-store sales targets, especially as a significant portion of Lowe’s revenue comes from DIY customers rather than professionals. Between July and January, Lowe’s store visits consistently fell behind Home Depot's visits, according to Placer.ai.

Challenging Year for Home Improvement Sector

According to Zaccone, 2023 revealed itself as one of the most challenging years for home improvement spending since the housing bubble burst. Factors including high interest rates, low housing turnover, and subdued consumer demand for durable goods contributed to fewer transactions and smaller basket sizes in this sector.

Analysts Lower Expectations, Stock Prices Rise

Recent Trends

Analysts have been adjusting their expectations downward in recent months. Earnings estimates for the quarter ending January 2024 have dropped by 1.4% compared to three months ago, with sales estimates seeing a more significant decrease of 5.1%, as reported by FactSet.

Despite the decline in estimates, stock prices in the home improvement sector have been on the rise. Investor optimism is driving this trend, suggesting that the sector may be emerging from a challenging period. Lowe's stock has seen a 17% increase over the past quarter, surpassing the S&P 500's 11% gain, while Home Depot shares have surged by 20%.

Stephanie Link's Bullish Outlook

Insight from an Expert

Stephanie Link, Hightower Advisors' chief investment strategist and portfolio manager, recently expressed optimism about the sector's future prospects. Link believes that the impact of the COVID-19 pandemic has been a factor contributing to the current market conditions but anticipates a turnaround on the horizon. While the exact timing remains uncertain—whether within the next quarter or later in the year—Link foresees a potential rebound in the sector by the end of 2024.

Preference for Home Depot

Link favors Home Depot over Lowe's, emphasizing the value of investing in the industry leader when it becomes more affordable. Despite recognizing Lowe's CEO Marvin Ellison's commendable performance and the company's lower valuation, Link remains inclined towards Home Depot due to its market dominance and strategic position.