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Home Depot and Lowe's: Home Price Appreciation Continues to Drive Pro Customer Demand

RJ Hottovy
Aug 19, 2022
Home Depot and Lowe's: Home Price Appreciation Continues to Drive Pro Customer Demand

As we noted in our May 20 update for Home Depot and Lowe’s, visitation trends had started to improve after a slow start to the seasonal selling season due to healthy backlog of Pro projects (a byproduct of home price appreciation), insulation from rising interest rates due fixed rate mortgages, and other non-traditional tailwinds such as increased wear and tear from consumers working and schooling from home. These trends continued for the home improvement retailers as 2Q22 progressed, as both Home Depot and Lowe’s saw improved visitation trends from May through July (below), although still running below 2021 levels as elevated pandemic-related demand continues to normalize.

While rising interest rates remain a headwind, both Home Depot and Lowe’s noted the strength of their Pro customer backlog and robust demand for Pro project materials (Home Depot noted double-digit comparable sales in building materials, plumbing and millwork departments as well as in certain project-related categories like fencing, siding, conduit boxes and fittings, tubs and showers, and countertops. Interestingly, projects have shifted from outdoors to indoors–something we discussed on the TD Ameritrade Network earlier this week–so it's not surprising that outdoor garden tools, appliances, indoor garden were below the company average.

Where do we go from here? We keep going back to comments from Home Depot CFO Richard McPhail regarding home prices and demand during the company's 1Q22 update:

Richard McPhail, Home Depot CFO
Over our history, we've seen that home price appreciation is the primary driver of home improvement demand. When your home appreciates in value, you view it as a smart investment and you spend more on it. So let's look at what's happened at home prices. We've seen appreciation of over 30% over the last two years. In fact, home equity values over the last two years have increased by 40% or over $7 billion just in the last two years. So the homeowner has never had a balance sheet that looks like this. They've seen the price appreciation, and they have the means to spend. And in surveys, our customers tell us that their homes have never been more important, and their intent to do projects of all sizes has never been higher. And our Pros say the same thing about their backlogs.

We thought we’d test this hypothesis by looking at visitation trends in markets where we’ve seen the greatest home price appreciation. We compared May home price data from CoreLogic/Case-Shiller with home improvement retail visits in each of these markets. While it's not a perfect correlation–notably Las Vegas–there does appear to be some linkage between home prices in a given market and home improvement retail visitation trends. By and large, markets with greater home price appreciation than the national average outperformed with respect to home improvement visitation trends (which skewed heavily toward Pro customer visits based on commentary from both Home Depot and Lowe’s).

Even against a rising interest rate environment, we expect home prices to remain ahead of pre-pandemic levels for some time. As such, the full-year sales outlook for both Home Depot (sales growth and comparable-store sales growth of 3% for fiscal 2022, we expect comp sales to be stronger in the first half of the year than in the second half of the year) and Lowe’s (comparable sales towards the bottom end of a range between -1% to +1%, with Pro customers continuing to outperform DIY for the remainder of the year). Given the difference in mix between DIY/Pro customers–at present, Lowe’s has a 75% DIY/25% Pro transaction mix versus Home Depot’s average of roughly 50% DIY/50% Pro – Home Depot’s expected outperformance is not a surprise.

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RJ Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for nearly 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank.

R.J. also brings a wealth of experience with early-stage investments as an investment committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he has advised over 50 foodservice and foodservice tech companies on more than $200 million in early-stage capital raises and M&A transactions.

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