Home improvement sector
Last year was tough for home improvement companies. The SPDR S&P Homebuilders ETF (XHB), which invests ~21.2% of its holdings in home improvement and home furnishing companies, fell 26.5%. However, this year, the returns on home improvement companies are positive despite the recent decline due to the renewal of the trade war between the US and China. YTD, XHB has returned 24.0%. The Fed toning down its aggressive rate hike stance, the lower unemployment rate, and wage inflation have led to a rise in home improvement retailers’ stock prices.
Home Depot’s stock performance
As the above graph shows, Home Depot (HD) has outperformed Lowe’s Companies (LOW) and the broader equity market. YTD (year-to-date), Home Depot has returned 14.5%, while the S&P 500 Index has increased by 12.7% during the same period.
In the first quarter, Home Depot posted adjusted EPS of $2.27, beating analysts’ estimate of $2.18. The company’s revenue for the quarter was $26.38 billion, marginally higher than analysts’ expectations. However, the company’s SSSG (same-store sales growth) stood at 2.5%, falling short of analysts’ expectation of 4.2%. The company’s management blamed wet weather conditions in February and deflation in lumber prices for its lower-than-expected SSSG. Despite reporting lower-than-expected first-quarter SSSG, the company’s stock increased by 3.0% since reporting its first-quarter results. The announcement by Federal Reserve Chair Jerome Powell on June 4 that the Fed is watching the impact of global trade on the US economy and is willing to act to support growth had led to a rise in Home Depot’s stock price.
Lowe’s stock performance
In the first quarter, Lowe’s reported revenue of $17.74 billion, outperforming analysts’ expectation of $17.66 billion. The company’s SSSG came in at 3.5%, beating analysts’ estimate of 3.2%. However, the company’s adjusted EPS was at $1.22, falling short of analysts’ estimate of $1.33 by 8.3%. Lowe’s management had blamed the convergence of cost pressure, significant changes to its merchandising organization, and its ineffective pricing tools and processes for lower-than-expected EPS. The lower-than-anticipated EPS and lowering of EPS guidance by the company’s management for 2019 had led the company’s stock price to fall 13.4% since the announcement of its first-quarter earnings. Despite the fall, Lowe’s was still trading 4.2% higher YTD as of June 5.