Key Points:
- Home Depot and Lowe’s FQ2 results demonstrate that the housing market and remodeling upgrades remain in a downcycle, but there are indications that the trend is softly turning up.
- DIY was the soft side of the business, reflective of higher interest rates, consumer hesitation (macro), and the “K-shaped economy.” Home Depot’s management stated sales exceeded plan, whereas Lowe’s said sales missed plan.
- Observed traffic (per Advan) was largely in line with reported results. Average ticket was stronger, which may reflect the parts of the business that are hard to observe (monthly billed Pro, HDS, etc.) and some diesel (etc.) inflation pass-through.
- Based on our analysis, Lowe’s traffic (per Advan) is 20% more sensitive to the 30-yr mortgage rate relative to Home Depot. Additionally, Home Depot has a higher exposure to Big-Pro and MRO, which were stronger in the period. Given these differences, Home Depot delivered stronger comp-sales and -traffic.
- Additionally, Home Depot (and regional brands) used tariff refunds to buy traffic (grills and seasonal goods).
- Encouragingly, the underlying monthly comp cadence was favorable for both Home Depot and Lowe’s. May was adversely impacted by weather. Traffic for August is running +140bps-plus stronger for both retailers.
- Despite hesitancy by the management teams to call out any improvement in larger projects, the big-ticket portion of transactions sequentially improved. Moreover, for both, observed traffic for longer visits (30 -120 minutes), which aligns with more complex projects and bigger tickets, also showed a favorable sequential trend month-over-month and much more so QoQ.
As shown in the following table, the comp results were largely in line with the observed trends, with ticket slightly above. We think that the stronger ticket reflects the stronger Pro and MRO segments of business, which are typically billed-businesses, which our credit card data doesn’t capture, or observe. Home Depot’s outperformance stems from (1) its higher exposure to the large Pro (call in Big-Pro) and MRO, (2) an amp up in seasonal promotions (which impacted gross margin and which was almost the entirety of the Q&A session), (3) differences in regional footprint (the Mid Atlantic was stronger), and (4) Lowe’s traffic has a higher sensitivity to mortgage rates. In describing the quarter’s dynamics, Lowe’s CEO Margin Ellison said, “Despite the heightened competitive landscape as competitors use tariff refunds to lower prices later in the quarter, we're encouraged by the continued momentum in our Total Home strategy. Strong performance in Pro, Online and Home Services helped to offset persistent macro pressures, softer DIY discretionary spend, and the challenging weather during Memorial Day weekend.” (That and seasonal were principally behind the negative traffic.)
As shown in the chart, traffic is highly sensitive to changes in the 30-yr fixed mortgage rate and there isn’t any material lag (on a 1-month basis). A regression of the data demonstrates that Lowe’s has an 18% higher sensitivity to rate relative to Home Depot. As such, rates moved higher intra-quarter, Lowe’s would be more impacted.
In terms of big-ticket and larger remodeling projects, both management teams playdown any improvement. However, looking at their disclosure, big-ticket improved by +140bps QoQ. We also see evidence of increased shopper interest in larger, more-complex projects in the improved pace of longer visits to the stores, visits that last within a 30-120 minute time period. For this FQ2, the numbers are a little mucked up given that these types of trips frequently happen on the weekend, and this July, the 4th landed on Saturday vs. last year’s on Friday. We’ve tried to adjust for that an that yields the “July adj” figures shown in the second table below. As shown, there was a steady improvement intra-quarter and for the period, these longer visits were up vs. being sharply down in FQ1.
On the Pro, Home Depot executive Ann Marie Campbell said, “Pro positive comp in the quarter, and we saw strong performance across all our Pro cohorts. This is being driven by the many investments we have made across our systems, capabilities for Pros, product assortment, job lot quantities, delivery, sales teams, and specialized services.”
Geographically, Lowe’s did well in the East North Central and Mid-Atlantic regions (which were strongest for both), and the Southeast per our observed spend data (which is largely DIY). This is shown in the sharp red coloring in the chart below. The Mountain region was soft for both. Lowe’s led in Texas. The West was flat.
As shown in the following table, July was a relatively soft month for Lowe’s. We also see that in the observed traffic data. August has firmed up since. CEO Ellison said, “We observed some heightened competitive pressures, primarily in July. We had competitors being aggressive on price, primarily seasonal categories. So think about grills, patio and live goods that probably drove unit and sales performance for them, but obviously was not very profitable. And so if you look at our July results, you can see that as an impact.” Home Depot’s chief merchant Billy Bastek said, “We saw strength in DIY across many spring-related categories, including live goods, mulch, soils, hardscapes, storage, patio and grills.”
On the consumer, Ellison said, “Our core consumer is a middle-income homeowner. They have a strong personal balance sheet. They have real disposable income growth. Their house is getting older, and they have increased equity. But the caveat to all of that is that this consumer is being cautious. And it's not just about fuel prices. Fuel prices make up roughly 2% of their annual spend, but it's a combination of fuel prices, geopolitical events and other uncertain things in the macro. And so when you combine all these things together, people are just being cautious with their discretionary spend…. We think this is cyclical. We do think it's a moment in time. The good news is we've delivered 5 consecutive quarters of positive comps with a DIY penetration north of 60%. So we feel great about how we are managing our business in arguably one of the most difficult DIY environments. And we know the moment we get any type of macro tailwind that our business was going to perform proportionate to that tailwind because we're doing a lot of things right. And so we don't think the consumer is getting worse. We think it's pretty much the same, but we think this is a healthy consumer that's overly cautious…”
In terms of the quarterly cadence and weather, Home Depot said that adverse weather held back May’s performance.
