Home deposit (HD) beat third-quarter expectations on Tuesday morning, with Lowe’s (DOWN) on deck early Wednesday. The HD stock was down slightly and the LOW stock was little changed ahead of Tuesday’s open after Home Depot earnings.
Home improvement retailers provide insight into the state of demand and price inflation in the home construction and renovation 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 July’s 15.6% increase, marking the fifth consecutive month of decelerating price appreciation. Meanwhile, existing home sales fell 30% in August, as did new home sales, CoreLogic reported last week.
Blame soaring mortgage rates for plummeting home sales and cooling prices. But homebuilders and housing-related retailers have rebounded in recent weeks as Treasury yields hit record highs as inflation begins to ease. This raises hopes that housing demand will start to improve, but not necessarily right away.
Housing issues are also raising concerns about demand for renovation suppliers and contractors, MKM Partners analyst David Bellinger wrote in a research note last week. But comparable store sales in the third quarter likely remained firm. And JP Morgan (JPM) Analyst Christopher Horvers believes dwelling names “should see more lagged negative reviews” through 2023.
Meanwhile, retailers with pricing power, in needs-based categories and controlling their margins, are best positioned as macro fears run high, Town (C) Analyst Steven Zaccone wrote in an October 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 worsen.”
Home Depot Profits
Expectations: A larger slowdown was expected in the retailer’s report on Tuesday. Home Depot’s third-quarter earnings are expected to rise 5% to $4.12 per share on revenue growth of 3% to $37.95 billion.
Results: Home Depot earnings rose 8.2% to $4.24 per share while revenue rose 5.6% to $38.87 billion.
Home Depot profits have now risen for 10 straight quarters. Year-over-year adjusted earnings growth slowed again after falling to 11% in the second quarter, maintaining a fourth consecutive quarter of gains below 20%. Revenue rose for a sixth consecutive quarter of single-digit or double-digit gains.
Same-store sales rose 4.3% in the third quarter after rising 5.8% in the second quarter. Home Depot is still struggling with bloated inventory, which rose more than 24% year over year in the third quarter. But that’s down from 35% in the second quarter.
Home Depot reaffirmed its 2022 outlook following its results. For the year, Home Depot still expects mid-single-digit EPS growth with total and component sales increasing about 3% and an operating margin of 15.4%. Wall Street forecast Home Depot profits to rise 3.6% and revenue to rise 1.8%.
Home Depot shares fell 1% premarket on Wednesday following the announcement. Shares edged down 2.6% on Monday ahead of its earnings report. HD stock is down nearly 26% year-to-date.
Home Depot resumed its 200-day moving average last week. HD stock arguably has a minimum basis with a buy point of 333.08. It is possible that stocks will start working on a handful.
Lowe’s earnings growth has slowed in 2022 and the company has seen lower or flat revenue for the past two quarters. For its second quarter ending in June, Lowe’s beat earnings estimates but fell short of revenue. Its EPS rose 9.8% from the same quarter a year ago to $4.67. Revenue was essentially flat, falling 0.34% to $27.476 billion from $27.57 billion.
Inventories rose nearly $2 billion to $19.33 billion for the quarter from $17.322 billion a year ago. Lowe’s overall store sales fell 0.3% for the period, while comparable sales in the United States fell 0.2%.
Expectations: Lowe’s earnings are expected to jump 13% to $3.09 per share, which would mark its best gain in a year. A 1% gain in revenue to $23.12 billion would be Lowe’s first positive quarter since January.
Lowe’s confirmed its full-year outlook following the second quarter report. The company expects EPS in the upper range of $13.10 to $13.60. And he’s looking for sales to be in the low range between $97 billion and $99 billion. Analysts estimate EPS to be $13.39 with revenue of $98.106 billion.
Lowe’s stock was little changed early Tuesday. Shares fell about 2% on Monday ahead of its earnings report on Wednesday, and stocks are down about 21% so far this year. The relative strength of the LOW stock hit a new high ahead of the results, with the relative strength rating hitting 69 on Monday. However, the stock remains deep in an 11-month correction.
Like HD stock, Lowe’s recently resumed its 200-day line and has a bottoming base. The buy point is 221.29.
You can follow Harrison Miller for more stock info and updates on Twitter. @IBD_Harrison
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