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Aug. 21, 2019, 6:58 a.m. EDT

Home Depot will feel the impact of lumber price deflation and Lowe’s improvement

Home Depot shares rise despite sales shortfall

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By Tonya Garcia, MarketWatch


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Home Depot said it was impacted by lumber price deflation

Home Depot Inc., the largest U.S. home improvement retailer, is feeling the squeeze for two reasons: lumber prices have topped out and competitor, Lowe’s Cos. Inc. has been improving its performance, according to the company and analysts,

Home Depot /zigman2/quotes/208081807/composite HD +0.27%   said lumber prices have fallen sharply since last year which will hurt sales, the company said.

“Lumber prices have declined significantly compared to last year, which impact our sales growth,” said Craig Menear, Home Depot’s chief executive, in a statement.

On Chicago Mercantile Exchange, lumber futures contract prices have fallen by nearly 50% since July last year to around $350 per thousand board feet.

The home improvement retailer updated its guidance to account for this deflation, “as well as potential impacts to the U.S. consumer arising from recently announced tariffs.” President Trump has imposed tariffs on imports from China of some goods sold by Home Depot.

Read: What really helped Walmart clean up with earnings -- robot ‘associates’

Home Depot now expects fiscal 2019 sales to rise by 2.3% and same-store sales to rise 4%. The FactSet consensus is for sales of $111.09 billion, indicating a 3.3% rise from last year. Same-store sales are forecast for 4% growth.

Moody’s agrees that tariffs could be an issue, with margins getting squeezed if they’re in place for an extended time or increase.

“So while we expect a stable housing environment and consumer trends to continue, profit growth for the overall sector could be pressured,” said Bill Fahey, Moody’s vice president. “However, we also view Home Depot as being better positioned than most to mitigate the impact from tariffs given its scale and extensive and diverse portfolio of products.”

Neil Saunders, managing director at GlobalData Retail, also thinks that Lowe’s is weighing on Home Depot results.

“While we believe that Lowe’s still has a lot of work to do before it even starts to match Home Depot on authority, brand visibility and convenience, it is gradually putting its house in order, which means the competitive environment is strengthening,” Saunders wrote.

See: Target will take a bite out of its grocery competition with Good & Gather, experts say

For the second quarter, Home Depot reported sales of $30.84 billion, up 1.2% from $30.47 billion last year and also slightly below the FactSet guidance for $31.0 billion.

Despite the miss, Home Depot shares are up 4.4% in Tuesday trading.

“While Q2 results were softer than initially hoped and a fiscal 2019 comp reduction is disappointing, we believe solid first half cost controls bode well for second half achievability, and view today’s print as a clearing event for an improving setup ahead, featuring easing year-over-year compares, cycling lumber deflation, potential housing category improvements, etc.,” wrote Wells Fargo analysts led by Zachary Fadem.

Wells Fargo rates Home Depot stock outperform.

Lowe’s /zigman2/quotes/205563664/composite LOW -0.12%   is scheduled to report its second-quarter results on Wednesday.

Home Depot shares have rallied 26.4% for the year to date while the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.03%   has gained 16.1% for the period.

/zigman2/quotes/208081807/composite
US : U.S.: NYSE
$ 230.83
+0.62 +0.27%
Volume: 3.42M
Sept. 18, 2019 6:30p
P/E Ratio
22.99
Dividend Yield
2.36%
Market Cap
$252.11 billion
Rev. per Employee
$261,993
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/zigman2/quotes/205563664/composite
US : U.S.: NYSE
$ 112.60
-0.13 -0.12%
Volume: 2.36M
Sept. 18, 2019 6:30p
P/E Ratio
35.17
Dividend Yield
1.95%
Market Cap
$87.00 billion
Rev. per Employee
$230,029
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,006.73
+1.03 +0.03%
Volume: 1.71B
Sept. 18, 2019 5:35p
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Tonya Garcia is a MarketWatch reporter covering retail and consumer-oriented companies. You can follow her on Twitter @tgarcianyc. She is based in New York.

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