HomeDepot (HD) topped third-quarter expectations Tuesday morning, with Lowe’s (LOW) on deck early Wednesday. HD stock fell slightly and LOW stock was little changed before the open Tuesday following Home Depot earnings.
The home improvement retailers provide insight into the demand and price inflation status of the home building 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 down from the 15.6% increase in July, marking the fifth consecutive month of decelerating price appreciation. Meanwhile, existing home sales were down 30% as of August, as were new home sales, CoreLogic reported last week.
Blame soaring mortgage rates for tumbling home sales and cooling prices. But home builders and housing-related retailers have rebounded in the past few weeks as Treasury yields have come off highs as inflation starts to ease. That raises the hope that housing demand will start to improve, though not necessarily right away.
Housing woes also raise concerns about demand for remodeling and contractor suppliers, MKM Partners analyst David Bellinger wrote in a research note last week. But Q3 comparable store sales are likely to have held firm. other JPMorgan (JPM) analyst Christopher Horvers believes housing names “should see a greater degree of lagged negative revisions” going into 2023.
Meanwhile retailers with pricing power, in needs-based categories and in control of their margins, are best positioned while macro fears are high, city (C) analyst Steven Zaccone wrote in on Oct. 31 research note. Fundamentals are “generally mixed-to-positive in the near term, but the rolling bear thesis is an overhang stating eventually trends will get worse.”
Home Depot Earnings
Expectations: More slowing was expected in the retailer’s Tuesday report. Home Depot Q3 earnings were expected to grow 5% to $4.12 per share on 3% revenue growth to $37.95 billion.
Results: Home Depot’s earnings rose 8.2% to $4.24 per share while revenue increased 5.6% to $38.87 billion.
Home Depot earnings have now grown for 10 consecutive quarters. Adjusted year-over-year profit growth slowed again after falling to 11% in Q2, now a fourth straight quarter of below-20% gains. Revenue rose for a sixth straight quarter of single digit, or low double-digit, gains.
Same-store sales rose 4.3% for the third quarter after growing 5.8% in Q2. Home Depot is still stuck with bloated inventories, which rose more than 24% year-over-year in Q3. But that is down from 35% in the second quarter.
Home Depot reaffirmed its 2022 outlook following its the results. For the fiscal year, Home Depot still expects mid-single-digit EPS growth with total sales and comps increasing about 3% and a 15.4% operating margin. Wall Street has forecast Home Depot earnings rising 3.6% and revenue growing 1.8%.
Home Depot stock fell 1% premarket Wednesday after the announcement. Shares edged down 2.6% on Monday prior to its earnings report. HD stock is down nearly 26% year to date.
Home Depot did retake its 200-day moving average last week. HD stock arguably has a bottoming base with a 333.08 buy point. It’s possible shares could be starting to work on a handle.
Lowe’s earnings growth decelerated in 2022 and the company reported lower or flat revenues for the past two quarters. For its second quarter ending in June, Lowe’s topped earnings estimates but fell short on revenue. Its EPS rose 9.8% over the same quarter a year ago, to $4.67. Revenue was essentially flat, falling 0.34% to $27.476 billion, down from $27.57 billion.
Inventories increased by nearly $2 billion to $19.33 billion for the quarter, up from $17.322 billion a year ago. Lowe’s reported overall store sales fell 0.3% for the period while comparable US sales fell 0.2%.
Expectations: Lowe’s earnings are seen jumping 13% to $3.09 per share, which would mark its best gain in a year. A 1% revenue gain, to $23.12 billion, would be Lowe’s first positive revenue quarter since January.
Lowe’s affirmed its full year outlook following the Q2 report. The company anticipates EPS in the upper range of $13.10-$13.60. And it looks for sales to range on the lower end between $97 billion-$99 billion. Analysts view EPS of $13.39 with revenue of $98.106 billion.
Lowe’s stock was little changed early Tuesday. Shares slid about 2% Monday ahead of its Wednesday earnings report, and shares are down roughly 21% so far this year. LOW stock’s relative strength reached a new high ahead of 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 retook its 200-day line and has a bottoming base. The buy point is 221.29.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
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