Home Improvement Boom’s Next Phase Favors Home Depot
(Bloomberg) -- Wall Street has been predicting that the pandemic-fueled boom in Americans fixing up their homes would fizzle as the economy reopened. But it hasn’t so far and could be entering a new phase that prolongs growth.
Home Depot Inc. and Lowe’s Cos. have benefited from homeowners taking on do-it-yourself projects in droves, with the retail giants combining to add roughly $55 billion in sales last year over 2019. While DIY surged, revenue from professional contractors took a back seat, which impacted Home Depot more because it gets a bigger percentage of its sales from that division.
Now the so-called “pro” business is on the mend, and investors will get a clearer sense of how much when the retailers report earnings this week. Surging home prices are convincing more people to see their homes as investments, which historically has spurred bigger renovations. Americans are also more comfortable with having workers in their homes. And there’s a huge backlog from projects being postponed during the pandemic.
“We’re seeing pro sales continuing to out pace DIY,” said Jonathan Matuszewski, a retail analyst at Jefferies. Last year, there were supply chain issues and other disruptions from Covid that delayed professional projects, he added.
Throughout much of the pandemic, Lowe’s had posted higher growth rates than Home Depot because, according to analysts, it generates about three-quarters of its sales from DIYers (Home Depot gets roughly 55%). But that streak came to an end in the first quarter and is likely to continue. Home Depot, which reports on Tuesday, is expected to increase U.S. same-store sales, a key retail metric, 4.9%, compared to a decline of 3.3% at Lowe’s.
It’s been quite a ride for investors. Since Covid-19 upended the U.S. economy in March 2020, Lowe’s has nearly tripled its stock price and Home Depot doubled, as both topped the performance of the broader market. Maintaining that frothiness will now hinge on courting professionals to buy materials, like lumber and piping, from them.
Under Chief Executive Officer Marvin Ellison, Lowe’s has invested in building out its pro business. The chain added staff to help professionals, launched a loyalty program and stocked the pro section of the store with popular tools and free phone charging stations.
At Home Depot, there has been “sequential improvement” in the company’s pro business since the start of the pandemic, CEO Craig Menear told investors at a conference June. That included the first quarter, when the professional unit outgrew DIY for the first time during Covid. The company has also been investing in this unit, including spending about $8 billion last year to acquire distributor HD Supply Holdings.
The annual growth rate of spending on home renovations and repairs will reach 8.6% by the middle of next year -- topping recent gains of 5%, according to the Leading Indicator of Remodeling Activity.
But there are headwinds. A rebound in travel and other types of activities means Americans have other spending options. Demand for contractors has also been high, leaving some homeowners waiting months for plumbers and electricians. And consumer confidence is taking a hit with Covid-19 resurgence in many parts of the country.
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