Housing Market Is Still Working in Home Depot’s Favour

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By guest author Jinjoo Lee from the Wall Street Journal.

August 15, 2023

Home Depot gen 1 MMMM How Home Depot became the dominant player in home improvement by catering to its professional customers. Photo: Katie Wise


High mortgage rates are keeping more potential home buyers on the sidelines and homeowners glued to their existing homes. Those seem like less-than-ideal conditions for retailers such as Home Depot HD 1.15%increase; green up pointing triangle, but the main building blocks of home-improvement demand are holding up.

National Home Price 2

Home Depot said Tuesday that U.S. comparable sales slipped 2% in the three-month period ended July 30 compared with a year earlier, marking the third consecutive quarter of on-year declines.

That was still a better performance than the 3.9% drop that Wall Street analysts were penciling in. The retailer also reported better-than-expected net income.

Consumers pulled back on big-ticket, discretionary items priced more than USD 1000 such as patio furniture and appliances—comparable sales declined 5.5 % in that price category. But they still kept spending on smaller projects: Home Depot noted positive comparable sales in live goods (meaning plants), landscapes and hardscapes.

This year is a reset year for Home Depot after increasing sales at a compound average growth rate of 12.6% over the last three as homebound cash-rich consumers splurged on renovations and fixes. The company reaffirmed its guidance for the current fiscal year, saying that it expects comparable sales to decline by 2 % to 5 %.

Home Depot shares, despite having risen 5.5 % this year, seem to be baking in some caution, trading at about 2.2 times forward sales, 22 % off the peak ratio reached in late 2021 and in line with their five-year average.

One reassuring point from Home Depot’s results is that their correlation with home prices still holds. Historically, the Case-Shiller U.S. National Home Price Index has had a 0.71 correlation with Home Depot and Lowe’s same-store sales growth, according to analysis from BofA Securities. After a dip starting mid-2022, the home price index has been rising every month since February, and as of May was down just 0.5% compared with a year earlier. Data from Redfin shows that the median home sale price rose again in June sequentially, supported by low inventory. The number of homes for sale declined 12% in June compared with a year earlier, according to Redfin.

Even though home purchases are associated with major renovation work, the main backbone of home spending comes from homeowners fixing their existing dwellings. Scot Ciccarelli, equity analyst at Truist Securities, estimates that even if new homeowners spend three times more on their house than the average homeowner, it still implies that over 90% of the industry’s sales go to existing homes. Historically, only about 4% to 5% of the existing housing units change hands in any given year.

Home Depot 3    Home Depot reported positive sales of smaller purchases such as plants, landscapes and hardscapes. Photo: Justin Sullivan/Getty Images


Also, Home Depot’s own guidance assumes the worst. The retailer noted on its earnings call on Tuesday that its share of personal-consumption expenditures rose in the last three years. The low end of its guidance assumes that its share of the consumer wallet reverts to 2019 levels, an estimate that seems overly conservative given consumers’ shift to spending more time at home and the rising age of the average home. Tuesday’s strong retail sales report indicates that Americans are still ready to spend.

Absent a big turn in home prices or consumer spending, home-improvement demand should hold up just fine.

Appeared in the August 16, 2023, print edition as ‘Housing Market Continues to Work in Home Depot’s Favour’.