Home Depot Beats Earnings Amid Housing Slump; Lowe’s is on deck

Home Depot (HD) topped expectations for the third quarter on Tuesday morning, with Lowes (LOW) on deck early Wednesday. HD stock was down while LOW stock was little changed after Tuesday’s market open following Home Depot earnings.

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The home improvement retailers provide insight into the demand and price growth status of the home building and remodeling markets.

Home prices rose 13% year over year in August, according to the latest data from the CoreLogic S&P Case-Shiller Index. That’s down from the 15.6% increase in July, marking the fifth consecutive month of slowing price increases. Meanwhile, existing home sales were down 30% from August, as were new home sales, CoreLogic reported last week.

Blame high mortgage interest rates for falling home sales and cooling prices. But homebuilders and home-related retailers have rebounded in recent weeks as Treasury yields have rallied as inflation begins to ease. It increases the hope that housing demand will start to improve, but not necessarily right away.

Housing woes are also raising concerns about demand for remodeling and contractor suppliers, MKM Partners analyst David Bellinger wrote in a research note last week. But comparable store sales in the third quarter are likely to have held steady. And JPMorgan (JPM) analyst Christopher Horvers believes residential names “should see a greater degree of delayed negative revisions” into 2023.

Meanwhile, retailers with pricing power, in need-based categories and control over their margins, are best positioned while macro fears are high, Citi (C) analyst Steven Zaccone wrote in a research note on Oct. 31. Fundamentals are “generally mixed to positive in the short term, but the rolling bear thesis is an overhang that says trends will eventually worsen.”

Home Depot revenue

Expectations: More declines were expected in the retailer’s Tuesday report. Home Depot Q3 earnings were expected to grow 5% to $4.12 per share on 3% revenue growth to $37.95 billion.

Results: Home Depot’s earnings rose 8.2% to $4.24 per share, while revenue rose 5.6% to $38.87 billion.

Home Depot revenue has now grown for 10 consecutive quarters. Adjusted year-over-year profit growth slowed again after falling to 11% in Q2, now the fourth quarter in a row of growth below 20%. Revenues rose for the sixth consecutive quarter with single-digit, or low double-digit, gains.

Same-store sales increased by 4.3% in the third quarter after growth of 5.8% in the second quarter. Home Depot remains stuck with bloated inventory, which rose more than 24% year-over-year in the third quarter. But that is down from 35% in the second quarter.

Home Depot reaffirmed its 2022 outlook after the results. For the financial year, Home Depot still expects 1-digit EPS growth with total sales and value added of approx. 3% and an operating margin of 15.4%. Wall Street has forecast Home Depot earnings to rise 3.6% and sales to rise 1.8%.

HD stock

Home Depot shares fell less than 1% after opening Tuesday. Shares fell 2.6% on Monday ahead of the earnings report. The HD share is down almost 26% so far this year.

Home Depot retook its 200-day moving average last week. The HD share undoubtedly has a bottom base with a buy point of 333.08. It is possible that stocks can start working on a handle.

Lowes

Lowe’s earnings growth slowed in 2022 and the company reported lower or flat revenue in the past two quarters. For the second quarter that ended in June, Lowe’s topped earnings estimates but came up short on sales. EPS rose 9.8% compared to the same quarter a year ago, to $4.67. Revenue was essentially flat, falling 0.34% to $27.476 billion, down from $27.57 billion.

Inventories rose nearly $2 billion to $19.33 billion for the quarter, up from $17.322 billion a year ago. Lowe’s reported total store sales fell 0.3% for the period, while US comparable sales fell 0.2%.

Lowe’s earnings

Expectations: Lowe’s earnings are seen jumping 13% to $3.09 per share, which would mark its best gain in a year. A 1% revenue gain, to $23.12 billion, would be Lowe’s first positive revenue quarter since January.

Lowe’s reaffirmed its full-year outlook following its Q2 report. The company expects EPS in the upper range of $13.10-$13.60. And it looks like sales will range on the lower end between $97 billion and $99 billion. Analysts are looking at EPS of $13.39 on revenue of $98.106 billion.

LOW stock

Lowe’s stock was up less than 1% early Tuesday. Shares fell about 2% Monday ahead of Wednesday’s earnings report, and shares are down about 21% so far this year. The LOW stock’s relative strength reached a new high ahead of the results, with a Relative Strength Rating of 69 on Monday. However, the stock remains deep in an 11-month correction.

Like HD stock, Lowe’s recently retook its 200-day line and has a bottom base. The buy point is 221.29.

You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison

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