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Home Depot and Lowe’s: Structural Changes Position Home Improvement Retailers for Multi-Year Outperformance

RJ Hottovy
Nov 18, 2022
Home Depot and Lowe’s: Structural Changes Position Home Improvement Retailers for Multi-Year Outperformance

Key Home Depot Metrics

Key Lowe's Metrics

Cautionary comments from Target may have been the most notable story in the retail industry this week, but Home Depot and Lowe’s also made news with relatively upbeat quarterly results. While both retailers saw an uptick in visitations ahead of and after Hurricane Ian, more of the success can be traced back to the structural changes in the category that we’ve been writing about much of this year, including non-traditional factors like increased home wear-and-tear due to work/school from home and migration trends have lifted demand for home improvement categories compared to pre-pandemic levels (especially for project categories) as well as more traditional factors like elevated home prices and a relatively healthy home improvement customer. Placer.ai data helps to sheds some additional light on why home improvement retailers are well positioned over the next several years.

  • Visitation trends are still down YoY, but improving. Home Depot U.S. comparable store sales grew 4.5% during the quarter (driven by an average ticket increase of 8.8% but partly offset by a comparable transaction decrease 4.4%), while Lowe’s comparable store sales grew 2.2% (including a roughly 8% increase in average ticket offset by a 5.8% decline in comparable transactions). Inflation across most product categories (save for lumber) helped to drive the increase in average ticket for both retailers. Placer data indicates that in-store visitation trends fell by a low-double -digit clip during the quarter for Home Depot and a mid teens decline for Lowe’s (both companies noted that digital sales growth outpaced in-store sales this past quarter, which likely explains the difference between our in-store visitation data and the reported comparable transaction figures). Our data also suggests continued improvement in visitation trends following the slow start to the seasonal selling season in March.

  • Home improvement visitations at pre-pandemic levels. On a Yo3Y basis, both Home Depot and Lowe’s visits were roughly on par to pre-pandemic levels in October. Home Depot management offered some additional thoughts about where the industry currently stands: "What we see now as we step back approaching three years is our transaction run rate, our sort of three-year CAGR at this point, is more or less pre-pandemic rates. And you could look at that at one hand and say, wow, here's the slowdown. On the other hand…you can look and say…this industry erupted with demand for a year and a half. Then it cycled significant cost increases. The customer hung in there and was resilient. And your net over this three-year period up in transactions and units despite, what we believe, you'll hold on to these price levels. I think that all goes back to the dynamics of this overall industry and the health and the engagement level of this customer…[If]we normalize from here, more than great. There's obviously all these questions about recession that we can't answer…But when you digest and look back on what's happened in the last three years, you'd say, wow, that's a pretty incredible market segment."

  • Home improvement shoppers are in a better position than many retail categories… As we’ve stated in the past, home improvement retail is better positioned to navigate an evolving macro landscape amid still-high inflation and rising interest rates for several reasons, as both retailers called out this week:


  • Home price appreciation. Lowe’s CEO Marvin Ellison reiterated that home price appreciation is the number one factor driving demand for home improvement products and services, something that our city-level visitation analysis reinforced earlier this year. Even if we were to see a broad-based decline in home prices, homeowners currently have a record amount of equity in their homes–nearly $330,000 on average, according to Ellison–which remains conducive to home improvement retail visitations. Both companies noted little sales disruption in U.S. markets that have seen a recent decline in home prices.
  • Age of housing stock. Placer.ai’s latest office index update indicates mixed trends with respect to return-to-work trends across the country, indicating that many consumers have embraced a hybrid working model and are still spending lots of time at home. With consumers spending more time at home–paired with the average age of a house in the U.S. being over 40 years old and roughly 3 million more homes built during the housing boom in the mid-2000s–it sets the stage for a large remodeling cycle over the next few years, which should drive increased demand for big ticket repairs. According to Lowe’s, this is a key reason why two-thirds of home improvement spend is nondiscretionary on repair or maintenance projects that cannot be delayed.
  • Disposable personal income and insulation from rising interest rates. Home Depot management noted that its core customer "tends to have a good job, growing wages, strong balance sheets," resulting in transaction trends that have been stronger than initially expected given the inflationary and rising interest rate backdrop. Some of this stems from favorable home ownership statistics. Among owner-occupied households, 40% are owned outright with no mortgage. According to Home Depot, of the 60% that do have a mortgage, 90% of those mortgages are fixed rate and 73% of those mortgages are fixed rate below 4% (insulating them from rising interest rates).
  • Household undersupply/trade up in place. Lowe’s management also noted that there is a 1.5 million to 2 million undersupply of homes and 250,000 first-time millennial home buyers are expected per year through 2025. This combination is causing existing homeowners to trade up in place, preferring to invest in repairs and renovations to make their current homes meet their family's evolving needs rather than buying a new home.


  • …which is driving Pro demand. The combination of still-strong home prices, the aging housing stock, disposable income and the shortage of housing underpins our views of increased structural demand for the home improvement category over the medium to long term. Both retailers reported strong Pro results, with their Pro customers noting that their backlogs are still very healthy. For Home Depot, big ticket comp transactions, or those over $1,000, were up 10.1% compared to the third quarter of last year, and During the quarter, our project business remained healthy. This can be seen in the double-digit comp performance of our building materials, plumbing, lumber, and millwork departments as well as in other categories like fencing, siding, conduit boxes and fittings, hubs and showers and cabinets.We're also encouraged by the momentum we continue to see with our larger Pro customers. These medium to large repair, remodel Pros continue to post strong double-digit comps. We believe we are building a unique interconnected Pro ecosystem that will increase our ability to grow share in a $450 billion addressable Pro space.  So we are now seeing a dynamic of stay in place and improve their home. And that's what our customers are telling us, and that's what the Pros are telling us their customers are telling them.consumer savings are near record highs, while disposable personal income remains strong. a Yo3Y basis, both Home Depot and Lowe’s visits were roughly on par to pre-pandemic levels in October. Home Depot management offered some additional thoughts about where the industry currently stands: "What we see now as we step back approaching three years is our transaction run rate, our sort of three-year CAGR at this point, is more or less pre-pandemic rates. And you could look at that at one hand and say, wow, here's the slowdown. On the other hand…you can look and say…this industry erupted with demand for a year and a half. Then it cycled significant cost increases. The customer hung in there and was resilient. And your net over this three-year period up in transactions and units despite, what we believe, you'll hold on to these price levels. I think that all goes back to the dynamics of this overall industry and the health and the engagement level of this customer…[If]we normalize from here, more than great. There's obviously all these questions about recession that we can't answer…But when you digest and look back on what's happened in the last three years, you'd say, wow, that's a pretty incredible market segment."

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RJ Hottovy

Head of Analytical Research, Placer.ai

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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