DIY store (HD) topped expectations for the third quarter by from Lowe (LOW) on deck early Wednesday. HD stocks fell, while LOW stocks showed little change following Tuesday’s market open following Home Depot earnings.
The home improvement retailers provide insight into the demand and price inflation status of the home construction 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 less than July’s 15.6% increase, the fifth consecutive month of declining price increases. Meanwhile, existing home sales fell 30% from August, as did new home sales, CoreLogic reported last week.
Blame rising mortgage rates for falling home sales and falling prices. But homebuilders and housing-related retailers have bounced back in recent weeks as government bond yields have come from a high as inflation begins to ease. That raises hopes that housing demand will begin to improve, though not necessarily right away.
Housing issues also raise 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 will likely have held up. And JPMorgan (JPM) analyst Christopher Horvers believes house names “should see more delayed negative revisions” in 2023.
Meanwhile, retailers with pricing power, in need-based categories and with control over their margins are best positioned amid macro fears, City (C) analyst Steven Zaccone wrote in an Oct. 31 research note. Fundamentals are “generally mixed to positive in the near term, but the rolling bear thesis is an overhang indicating that trends will eventually get worse.”
Home Depot Income
expectations: More delays were expected in the retailer’s Tuesday report. Home Depot Q3 earnings were expected to grow 5% to $4.12 per share on revenue growth of 3% to $37.95 billion.
Results: Home Depot’s earnings rose 8.2% to $4.24 per share, while sales rose 5.6% to $38.87 billion.
Home Depot revenues have now grown for 10 consecutive quarters. Adjusted year-over-year earnings growth slowed again after falling to 11% in the second quarter, now a fourth consecutive quarter of earnings below 20%. Sales rose for the sixth consecutive quarter with single-digit or low-double-digit gains.
Same-store sales rose 4.3% in the third quarter, after growing 5.8% in the second quarter. Home Depot is still mired in inflated inventories, which rose more than 24% year-over-year in the third quarter. But that’s less than 35% in the second quarter.
Home Depot reaffirmed its 2022 outlook following the results. For the fiscal year, Home Depot still expects mid-single-digit earnings per share growth, with total revenue growing about 3% and an operating margin of 15.4%. Wall Street has forecast Home Depot revenues to rise 3.6% and sales 1.8%.
Shares of Home Depot fell less than 1% after Tuesday’s opening bell. Shares fell 2.6% on Monday ahead of the earnings report. HD shares are down nearly 26% year to date.
Home Depot recaptured its 200-day moving average last week. HD stocks are likely to bottom with a buy point of 333.08. It is possible that stocks are starting to work on a handle.
Lowe’s earnings growth slowed in 2022, and the company reported lower or flat revenue for the past two quarters. For the second quarter ending in June, Lowe’s earnings exceeded expectations, but sales fell short. Earnings per share rose 9.8% from the year-ago quarter 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, compared to $17.322 billion a year ago. Lowe’s reported total store sales fell 0.3% for the period, while US comparable store sales fell 0.2%.
expectations: Lowe’s earnings are up 13% to $3.09 per share, which would be the best earnings in a year. A 1% increase in sales to $23.12 billion would be Lowe’s first positive sales quarter since January.
Lowe’s reaffirmed its full-year outlook following its Q2 report. The company expects EPS in the higher range of $13.10-$13.60. And it looks like revenue on the lower end will be between $97 billion and $99 billion. Analysts estimate earnings per share at $13.39 on revenue of $98.106 billion.
Lowe’s stock rose less than 1% early Tuesday. Shares fell about 2% Monday ahead of Wednesday’s earnings report and shares are down about 21% year to date. The relative strength of the LOW stock reached a new pre-result high, with a relative strength rating of 69 on Monday. However, the stock remains deep in an 11-month correction.
Like HD stocks, 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 market news and updates on Twitter @IBD_Harrison
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