Image Source: Mike Mozart
The home improvement retailing market appears very, very healthy, and while consumers could have already taken advantage of ultra-low rates to do home repairs, additional Fed cuts certainly won’t hurt the backdrop for home improvement retailers. Home Depot and Lowe’s continue to put up solid results.
By Brian Nelson, CFA
On August 20, Home Depot (HD) reported decent second-quarter results, with total reported sales advancing 1.2% on a year-over-year basis thanks to solid comparable store sales expansion of 3% (3.1% in the U.S.). Net earnings came in at $3.17 per share, growing 3.9% from the same period a year ago. Though many viewed the comp performance as somewhat disappointing, management noted that it experienced “accelerating comp performance throughout the quarter.” Home Depot did note that lumber prices and tariffs would impact full-year sales guidance, however:
We are encouraged by the momentum we are seeing from our strategic investments and believe that the current health of the U.S. consumer and a stable housing environment continue to support our business. That being said, lumber prices have declined significantly compared to last year, which impacts our sales growth. As a result, today we are updating our sales guidance to account primarily for continued lumber price deflation, as well as potential impacts to the U.S. consumer arising from recently announced tariffs. We are reaffirming our earnings-per-share growth guidance for fiscal 2019.
Home Depot now expects fiscal 2019 sales to grow ~2.3% and for comparable store sales to increase 4%. Management had been targeting sales growth of ~3.3% previously, and comparable store sales expansion in the range of 5%. The revision seems to be mostly driven by lumber price deflation, which negatively impacted comp performance during the most recently reported period by more than 100 basis points. Home Depot CFO Carol Tomé had the following to say on the conference call:
While global economic pessimism has increased due to geopolitics, currently, the U.S. consumer remains healthy. Consumer confidence is near record high levels and wages are up over 3% from last year. Housing metrics are in line with the assumptions we used to build our 2019 financial plan. Nonetheless, what we didn’t expect when we built our plan was the significant lumber price deflation we’ve experienced. We are now more than halfway through the year and lumber prices are below the levels we saw in the first quarter of fiscal 2019…Additionally, the U.S. consumer is facing the impact of tariffs. While trade discussions are fluid, consumer demand could be impacted.
Lowe’s (LOW) reported strong second-quarter results August 21 that showed total sales advance 0.5% thanks to comparable store sales growth of 2.3%, well ahead of consensus expectations of ~1.8%. The big story in the report is that Lowe’s U.S. home improvement business increased 3.2% during the period, which came in better than the pace of expansion (3.1%) that Home Depot reported in the U.S.
Although Home Depot’s overall pace of growth is better than that of Lowe’s, it seems as though the latter is starting to make some headway against Home Depot in the ultra-competitive U.S. home improvement retailing market. The second quarter of 2019 is now the second quarter in a row that Lowe’s U.S. comp was better than Home Depot’s. Lowe’s CEO Marvin R. Ellison had the following to say about the second-quarter performance:
We capitalized on spring demand, strong holiday event execution and growth in Paint and our Pro business to deliver strong second quarter results. Despite lumber deflation and difficult weather, we are pleased that we delivered positive comparable sales in all 15 geographic regions of the U.S. This is a reflection of a solid macroeconomic backdrop and continued momentum executing our retail fundamentals framework
Looking ahead, Lowe’s is targeting total sales to increase ~2%, while comparable store sales are targeted at ~3%. Diluted earnings per share is expected in the range of $5.45-$5.65 for the fiscal year ending January 31, 2020. We’ve viewing the reaffirmation of the top and bottom-line guidance as almost a guidance raise in light of deteriorating lumber prices, so the quarterly report at Lowe’s was very much a standout. Shares of Lowe’s were up double-digits during the trading session August 21.
Concluding Thoughts
The home improvement retailing market appears very, very healthy, and while consumers could have already taken advantage of ultra-low rates to do home repairs, additional Fed cuts certainly won’t hurt the backdrop for home improvement retailers. Home Depot and Lowe’s continue to put up solid results.
Though the trajectory of Home Depot’s 2019 sales expansion has changed modestly lower, we don’t view the sales revision as material enough for us to adjust our valuation model. We believe Home Depot’s shares are fully priced at current levels, trading above the high end of our fair value estimate range of ~$210 per share. The firm’s Dividend Cushion ratio stands at 1.2x, while it sports a healthy dividend yield of ~2.6%.
We like what we’re seeing at Lowe’s, especially in the strength of it U.S. operations, but shares are also fully priced, albeit not as expensive as that of Home Depot. The high end of our fair value estimate for Lowe’s is $118 per share, so the company still has some room to run before we would consider shares to be significantly overpriced (shares are trading at ~$109 at the moment). The company’s Dividend Cushion ratio stands at 1.9x, while it pays a dividend yield of ~2.2%.
Building Materials: CSL, LPX, MAS, MHK, MLM, OC, OSB, VMC
Related: LL, FND, ITB, XHB, PKB, AFI, TILE
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.