Home Depot and Lowe's face slump from high rates, housing prices

Elevated mortgage rates and record-high home prices are poised to put an end to the home-improvement spending boom that drove growth at Home Depot Inc. and Lowe's Cos. over the pandemic period. 

Between 2020 and 2022, both companies benefited from locked-down consumers that took on renovations. Historically low borrowing costs also fueled new home purchases. Now, with mortgage rates near their highest level in two decades and a steep drop in home sales, the retailers are on track to report their first simultaneous declines in full-year revenue growth since fiscal 2010. 

Third-quarter results from Home Depot, which will be released on Tuesday, and Lowe's, scheduled for a week later, are expected to show a fourth consecutive drop in comparable sales and a third straight decline in overall revenue. Analysts expect Lowe's to post a same-store sales decline of nearly 5% in the period, which would be the largest since 2009.

"Numerous data points — including poor earnings reports from competitors Tractor Supply and Floor & Decor — indicate continued pressure on home improvement retail demand, with weakening trends in October now more likely to persist in the near-term," Wedbush analysts led by Seth Basham wrote in a note. 

Since many Americans pulled their home improvement projects and appliance purchases forward in 2020 and the subsequent pandemic years, many home projects won't need to be addressed for some years. That trend has also impacted retailers ranging from Maytag owner Whirlpool Corp. to Best Buy Co.

"Over the last couple of years, personal consumption on home improvement has taken up a greater share of wallet, and that has retraced as people have switched from goods to services," Bloomberg Intelligence analyst Drew Reading said in an interview. 

Reading predicted a decline in sales at both Home Depot and Lowe's through the first half of next year as spending on discretionary goods continues to come under pressure. Last week, Baird analysts lowered their expectations for both Home Depot and Lowe's for the fourth quarter and all of 2024, noting the slowing economic environment and the likelihood interest rates stay high. 

Back to Normal

To be sure, annual revenue at both companies remains well above 2019 levels, meaning that a decline in sales could represent a return to a more typical cadence of growth rather than deeper trouble. 

"In the long term, Home Depot should remain a winner in retail, given its best-in-class execution, digital strength, and hybrid work-from-home arrangements causing more maintenance and repair activity," Telsey Advisory Group analyst Joseph Feldman wrote in a note.