Wall Street is bracing for another quarter of weak sales from U.S. home improvement chains Home Depot (HD.N) and Lowe's (LOW.N) as demand remained under pressure from uneven consumer spending and a subdued housing market.
Expectations have been revised roughly 17% lower for Home Depot's same-store sales for the third quarter compared to early September, LSEG data showed, while estimates for Lowe's have come down about 19% during the same period.
Key demand indicators - such as category sales figures from the U.S. Census Bureau and home sales - pointed to a sequential softening in the home improvement industry in the quarter, analysts said.
"Most likely, a recovery won't be in sight until the second half of 2024," UBS analyst Michael Lasser said.
"In the meantime, the market will be looking for indications of the level of sustainable margins and any signs of increased discounting as demand weakens," he added.
Earnings reports from other home improvement chains have solidified the concerns.
Tractor Supply (TSCO.O) and Floor & Decor (FND.N) cut their annual sales forecasts in recent weeks, with the latter blaming near-record-low home sales and weaker big-ticket discretionary demand.
THE CONTEXT
Small-scale renovations and repair work - which had helped counter some of the impact from a pause in large home improvement projects in the past few quarters - are also facing a squeeze now.
Such projects are becoming even smaller - 24% of "Pro-customers" such as contractors and professional builders surveyed by Wells Fargo saw project sizes decrease in August from July, setting up for a steeper drop in big-ticket purchases at the retailers.
U.S. existing home sales dropped to a 13-year low in September, weighed by rising mortgage rates and tight supply.
"The consumer continues to soften with the recent step down likely (due in part to) student loans, holiday shopping shifting back to Nov/Dec, some shock effect from geopolitics, and a consumer that is ... continuing to shop closer to need," J.P. Morgan analyst Christopher Horvers said.
THE FUNDAMENTALS
** Home Depot is expected to post a 3.3% drop in quarterly same-store sales when it reports on Tuesday; net earnings are expected to fall 13.9%
** Analysts expect Lowe's, which reports on Nov. 21, to show a 4.9% fall in third-quarter same-store sales and a 13.6% drop in comparable profit
WALL STREET SENTIMENT
** Shares of Home Depot and Lowe's have declined 7.7% and 2.3%, respectively, year-to-date, compared with the benchmark S&P 500 index's (.SPX) 15% rise in the same period
** Both home improvement retailers have an average "buy" rating among more than 35 brokerages covering the companies
** Home Depot's median PT has come down to $332 from $350 a month earlier, while Lowe's median PT has slid to $225 from $250. At least five brokerages cut PTs on both stocks in the past two weeks
