Home Depot’s
downbeat forecast sent a chill through the home improvement sector and the wider market when it reported earnings Tuesday. That pushed down
Lowe’s
stock, and likely will further drive down expectations for the rival retailer’s coming results.
Home Depot cut both its top- and bottom-line guidance for the full fiscal year. It now sees sales falling 2% to 5% from 2022, compared with its previous forecast of flat year-over-year revenue. It also expects earnings per share to fall 7% to 13% on an annual basis; it had previously guided for a decline in the mid-single digits.
Lowe’s stock was down 1.5% in recent trading Tuesday, while Home Depot fell 1.6%.
Analysts have already been bringing down their earnings per share and revenue estimates for Lowe’s (ticker: LOW), which stand at $3.45 a share and $21.68 billion, respectively. However, Home Depot’s (HD) quarterly results will likely lead to further estimate revisions before Lowe’s reports earnings on May 23.
That’s because worrisome data in Home Depot’s report reflect mounting headwinds for the industry. Oppenheimer analyst Rupesh Parikh writes that Home Depot’s results were “weaker than our expectations of a ‘so-so’ first quarter…[and] bodes poorly for trends” at Lowe’s.
Even stripping out the impact of bad weather and tumbling lumber prices, Home Depot said on its conference call that its quarter was mixed—driven by what appears to be tapped out consumers pulling back their home improvement budgets.
Home Depot shoppers shied away from big-ticket discretionary items as overall same-store sales fell harder than expectations. Professional customers’ backlogs remain elevated from a historical level, but nonetheless fell from the previous year. Pros have also skewed away from bigger remodeling jobs to smaller projects. In addition, even shoplifting appeared to be on the rise, as has been the case at other retailers: Home Depot cited “shrink”—an industry term that includes theft—as the main driver of lower gross margins.
By and large investors were already braced for bad news, given factors spanning a weak housing market to inflation. But Home Depot’s results confirmed many of those fears about home improvement trends. Lowe’s will likely be affected by many of the same factors hurting Home Depot and other smaller rivals—such as a late spring and falling lumber prices.
In other words, Home Depot’s expectation for “2023 to be a year of moderation in the home improvement market” might apply to peers as well.
That said, it isn’t an apples-to-apples comparison, and some company-specific factors could help Lowe’s. Analysts at M Science note that Home Depot “seemed to have lost some share this quarter to Lowe’s.”
Lowe’s greater exposure to DIY customers, who typically take on smaller projects, could also shield it from some of the drop-off in pricier large-scale renovations. In addition, Jefferies’ analyst Jonathan Matuszewski notes that Lowe’s smaller exposure to the Western U.S. leads him to “anticipate less of a headwind from unfavorable weather on comparable sales.”
Lower expectations might help, too, giving Lowe’s a lower bar to clear.
Nonetheless, the stock is unlikely to get much of a break if Lowe’s also confirms wobbly consumer demand and ongoing uncertainty in the quarter—and beyond, with its own outlook.
Write to Teresa Rivas at [email protected]
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