Home improvement retailers Home Depot (HD) and Lowe's (LOW) are scheduled to report results of their fourth quarters before the market open on Tuesday, February 25, and Wednesday, February 26, respectively. Home Depot's conference call is scheduled for 9:00 am EDT on Tuesday and Lowe's will hold its quarterly call on Wednesday at 9:00 am EDT. What to watch for:
1. HOUSING MARKET COMMENTARY: Builder confidence in the market for newly-built single-family homes edged one point lower to 74 in February, according to the National Association of Home Builders/Wells Fargo Housing Market Index. The last three monthly readings mark the highest sentiment levels since December 2017, the NAHB said. "Steady job growth, rising wages and low interest rates are fueling demand but builders are still grappling with increasing construction and development costs," said NAHB Chairman Dean Mon.
Wells Fargo analyst Zachary Fadem said he is bullish on the 2020 home improvement setup and continues to view home improvement among the most compelling categories in his coverage. While Home Depot and Lowe's shares are near all-time highs and the China supply chain issues could prove a sticking point, Fadem views FY20 expectations as reasonable, near-term reads/indicators favorable, and he sees upside from underlying housing benefits and a potential return of commodity inflation. Loop Capital analyst Laura Champine raised her price target on Home Depot to $215, adjusting her model to reflect a more positive macro backdrop. The analyst cited more bullish sales expectations coming from a more settled trade environment, healthy consumer spending, improving housing data.
2. COMPETITION: Analysts and investors will listen for comments on how the home improvement retailers view competition with online retailers like Amazon (AMZN). Home Depot has been spending aggressively to bulk up its e-commerce business and narrow the delivery window. Last July, Home Depot said it planned to spend $1.2B over the next five years on its supply chain. As Sears' (SHLD) store base continues to shrink, and with J.C. Penney (JCP) pulling out of the appliance category, Home Depot is expected to continue to take a larger share of that market. Lowe's said it plans to hire more than 53,000 full-time, part-time and seasonal associates across its more than 1,700 U.S. stores this spring, while Home Depot plans to hire 80,000 associates this spring.
3. GUIDANCE: In December, Home Depot backed its FY19 earnings per share view of about $10.03, just missing the $10.08 consensus at the time, with revenue growth of approximately 1.8% and same-store sales growth of approximately 3.5%. At the time, Home Depot forecast FY20 revenue up 3.5%-4%, with SSS up 3.5%-4% and an operating margin of approximately 14%. The company said at its investor and analyst conference that 2020 is seen to be a peak year of investments for its $11B "One Home Depot" program. Morgan Stanley analyst Simeon Gutman said while he, and the buy-side, were already expecting below consensus guidance, e had been modeling 4.5% comps and a 14.4% EBIT margin in 2020 and "did not anticipate the magnitude of the miss relative to expectations." Incremental margin pressure, due mostly to growing headwinds from shrink, as well as softer than expected sales growth seem to be the culprits leading to the weaker than expected guidance, added Gutman. Stifel analyst John Baugh told investors in a research note that the tone of the meeting from the sell side and investors was "fairly negative," and said he thinks 2020 will be a transition year. Meanwhile, Baird analyst Peter Benedict said that the company's analyst/investor meeting in New York set a "very reasonable bar" for fiscal 2020.
In November, Lowe's reported a top and bottom line beat for its Q3, and raised its FY19 adjusted EPS view to approximately $5.63-$5.70 from $5.45-$5.65, and forecast FY19 revenue up approximately 2% and SSS up approximately 3%. At the time, analysts expected FY19 EPS of $5.67. Baird analyst Peter Benedict said Lowe's Q3 results marked "another good progress report" that reinforced his positive thesis on the company. The analyst noted that Lowe's remains a "compelling turnaround story" offering "significant" long-term earnings growth power with "meaningful" opportunities to improve its execution across its lines of business. Jefferies analyst Jonathan Matuszewski added Lowe's to his firm's Franchise Pick list and increased his comp sales estimate to 3.5% from 3.2% to reflect greater confidence in the company's Pro sales acceleration following his recent loyalty program checks.
