Big players in home improvement retail like Home Depot and Lowe’s are outpacing the wider retail market and anticipated to sustain their performance over the next 12 to 18 months, according to a report from Moody’s Investors Service emailed to Retail Dive. Moody’s expects operating income in the sector to grow 5% to 7% in 2017 and 6% to 8% in 2018, significantly higher than its forecast for the broader retail industry, which analysts expect will grow 3% to 4% in 2017.
A strong housing market and other healthy economic fundamentals are giving the space a boost, sadly, from rebuilding in areas where hurricanes have devastated properties, Moody’s also said. Roughly 40% of Home Depot’s sales and around 30% of Lowe’s sales are coming from professionals.
That strong market could morph into a challenge, however, Moody’s warned. If housing prices continue to rise, consumers may lose their appetite (or the resources) to either purchase a home or make substantial alterations.
Home improvement retail had a nightmarish run around the time of the Great Depression, when the sector experienced a 14% collapse in revenue, twice the nearly 7% decline in retail sales, according to U.S. Census Bureau data cited in the Moody’s report.
"Sales began to stabilize and the building materials segments started to outpace overall retail sales around 2012, year-over-year," according to Moody’s. "While Home Depot and Lowe's took a performance knock during the recession, both still managed to outperform the broader home improvement sector, which they continue to do. The home improvement sector, in turn, has generally outperformed retail on the basis of sales since 2013, according to U.S. Census data."
The market has revived and then some. Consumers, who remained skittish for a while after the recession, even as the economy and personal finances continued to recover, have loosened up, with many viewing home improvement spending part of a wise investment.
The dip in home improvement spending flagged by Moody’s is already happening to some extent, according to research from GlobalData Retail, which found earlier this year that transactions at Home Depot are already down, the result of a supply shortage that is restricting housing moves and spiking prices for first-time buyers.
But not even an expected slowdown in the housing market will hurt the retailer much thanks to its own strong fundamentals, according to GlobalData Retail analyst Håkon Helgesen. "[W]e remain confident about the future outlook for Home Depot," he said in a note emailed to Retail Dive. "There are some small clouds on the housing front, but even if these do grow, they are not yet close enough to affect performance over the remainder of this year."
Lowe’s, while also performing well compared to other retailers and also bouncing back from lackluster sales earlier in the year, is being overshadowed by its major rival — Home Depot.
"This has become more of an issue over recent quarters, mainly because Lowe's marketing has been slightly off-pitch and has not resonated with consumers," GlobalData Retail Managing Director Neil Saunders told Retail Dive in an August email. "Despite the addition of more services and brands for the pro-shopper and a good marketing effort, we still feel that Lowe's is behind Home Depot when it comes to both visibility and success with this increasingly important group of customers.”
This isn't the first time Home Depot has outshined Lowe's in recent earnings reports: In November, Lowe’s lowered its guidance after its Q3 results missed analyst expectations while Home Depot maintained its guidance, posting strong same-store sales and traffic. But by other measures, Lowe’s is demonstrating higher productivity, according to Market Realist.
Over the last year, Lowe’s has made a series of organizational changes as the company seeks to differentiate itself and capitalize on opportunities in a favorable segment. The company announced in January it would cut 2,400 jobs across its 285,000-employee U.S. workforce. The company has also been pushing into new technologies that can enhance the consumer experience, including robots, virtual and augmented reality, and a partnership announced in November with customer engagement startup b8ta to feature smart home devices and other devices in a store-within-a-store model. And next year Lowe's will join its Orchard Supply unit in selling popular Craftsman tools.