The robust growth in home-improvement spending, which propelled Home Depot Inc. (NYSE:HD) and Lowe’s Co. (NYSE:LOW) during the pandemic, is facing headwinds due to elevated mortgage rates and record-high home prices. Both companies benefited from increased home renovations and historically low borrowing costs between 2020 and 2022. However, with mortgage rates now at their highest level in two decades and a significant drop in home sales, Home Depot and Lowe’s are expected to report their first simultaneous declines in full-year revenue growth since fiscal 2010.
Third-quarter results from Home Depot, scheduled for release on Tuesday, and Lowe’s, set for a week later, are anticipated to reveal a fourth consecutive decline in comparable sales and a third straight drop in overall revenue. Analysts predict Lowe’s may experience a nearly 5% decline in same-store sales for the period, marking the largest since 2009.
Home Depot and Lowe’s shares have experienced slight declines, with Home Depot shares down 8.4% since the beginning of the year and Lowe’s shares down approximately 2.5%. The weakening trends in the home improvement retail sector are evident in poor earnings reports from competitors like Tractor Supply and Floor & Decor.
The shift in consumer spending from goods to services, along with the fact that many Americans advanced their home improvement projects in 2020, has contributed to the anticipated decline in sales for both Home Depot and Lowe’s through the first half of the next year. Analysts, including those at Baird, have revised their expectations for both companies, considering the economic slowdown and the likelihood of sustained high interest rates.
While the decline in sales could signal a return to a more typical growth pattern, both companies still boast annual revenue well above 2019 levels. Analysts like Telsey Advisory Group’s Joseph Feldman believe that Home Depot, in the long term, remains a winner in the retail sector due to its strong execution, digital capabilities, and the ongoing trend of hybrid work-from-home arrangements leading to increased maintenance and repair activity.
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