We surveyed real estate brokers across the country regarding recent home price trends and the outlook over the second half of the year. Our work suggests buyer demand continues to improve - particularly in less densely populated regions - amid lower interest rates and a lack of housing supply. We view this as an overall positive for both Home Depot (HD) and Lowe’s (LOW) as further price appreciation instills consumer confidence for project-related work, consistent with our recent survey and checks in the home improvement space.
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We surveyed several hundred home improvement customers (geo-location verified shoppers at Home Depot or Lowe’s stores over the past 60 days) to better assess the sustainability of outsized Q1 sales growth for both HD and LOW. In our view, stay-at-home orders have provided a jolt to DIY project work and positive momentum has continued into early June, although at a somewhat lesser pace than May per our latest industry checks - pro business has improved though. We expect heightened top-line trends to hold in for at least some time given a backdrop of strengthening housing data points lately.
We spoke with Isabel Janci, VP of Investor Relations and Treasurer, as well as Tim Walsh, Director of Investor Relations. We view comments from HD, as well as our industry contacts, as positive and remain constructive on the outlook for home improvement retail. Our broader home improvement checks indicate DIY trends have remained strong, although have cooled a bit off May levels, while the pro segment continues to pick up. Key highlights follow below:
We’re continuing to see signs of recovery (we had begun seeing an improvement on May 15) across our leisure and hardlines coverage. Powersports retail demand remains a standout—sales of off-road vehicles, boats and RVs picked up significantly in May and momentum has continued into June—although inventory replenishment is an increasing focus. Cruise trends improved modestly over the past few weeks. Home improvement is seeing continued strength although DIY trends are likely moderating off peakish May levels; however, pro biz improved in June. The recovery in auto parts retail is further taking shape with commercial sales picking up of late. Finally, small biz activity has been accelerating over the last several weeks as states re-open, according to Office Depot.
After the market close (6/8/20), Scotts Miracle Gro (SMG) again lifted full-year 2020 sales guidance indicating a much better-than-planned Q3 period (ending June). Consumer purchases of lawn and garden products at retail surged during the month of May as DIY sales momentum continues on. We interpret this latest data point as consistent with our latest checks for the home improvement sector and following positive commentary from both Home Depot (HD) and Lowe’s (LOW) on a strong start to Q2.
Our latest checks across the home improvement space suggest spending on DIY projects has not slowed and pro activity continues to improve. This is consistent with our prior checks (through May 15th) and initial Q2 commentary from both Home Depot (HD) and Lowe’s (LOW). Top-line trends are expected to remain elevated for some time as consumers remain in a stay-at-home mindset.
Following recent earnings reports across leisure, food retailers, and hardlines retailers, we are publishing updated estimates and price targets for each of the following: Norwegian Cruise Lines (NCLH), Royal Caribbean Cruises (RCL), Walmart (WMT), Sprouts Farmers Markets (SFM), Advance Auto Parts (AAP), AutoZone (AZO), Home Depot (HD), Lowe’s (LOW), Wayfair (W).
Early this morning (5/19/20), Home Depot (HD) reported Q1 results highlighted by a surge in sales later in the quarter and continuing into the first two weeks of Q2 - in line with our latest checks across the home improvement space. Incremental costs associated with certain operational changes amid COVID-19 limited the flowthrough to the bottom line with a $0.60 negative impact to EPS. We await further details on Q2 to date trends on this morning’s 9AM ET conference call, as well as any comments towards the level and duration of higher operating costs expected in the current environment. Shares of HD are indicated down about 2-3%, but remain up +17% since early March outperforming a +7% gain in the S&P 500.
We think DIY strength has continued into mid-May as consumers remain at home and take on more project work amid favorable spring weather. Notable categories with outsized growth include paint, lawn and garden, outdoor power equipment, cleaning supplies, and are all contributing to much larger ticket sizes. This tracks consistent with recent sector data points we highlighted on April 29th and May 6th.
We’ve seen improved demand across several segments of the consumer landscape. Most discretionary categories appear to have bottomed-out in late March / early April and have subsequently improved week-to-week, with less discretionary categories like home improvement enjoying healthy demand over the last 2-months. Changes in vacation spend and summer plans (fewer camps, sports, etc.), are likely helping, but the big unknown over the next few quarters is whether the demand we’re seeing is sustainable in light of higher unemployment and lingering economic impacts from coronavirus.
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