• by Sarah Mahoney  @mahoney_sarah, July 5, 2023

The Home Depot and Lowe’s keep threading their way through complex (and often conflicting) economic trends, looking for new ways to serve a customer base that’s changed radically in the last few years.

The pandemic boom – when everyone wanted to buy a new house, build a deck or at least repaint their bathroom – is a distant memory. Instead, both companies are faced with customers who are cutting back, as well as a housing market that can’t seem to catch up with itself.

In May, Home Depot didn’t just fail to meet its sales forecast. It was the biggest revenue miss it’s had in 20 years. And while Lowe’s recently beat its sales and earnings goals, it lowered its outlook, citing pull-backs in consumer spending.

Wedbush Securities recently hosted a meeting for investors with Richard McPhail, Home Depot’s executive vice president and CFO. And while Seth Basham, the Wedbush analyst who follows Home Depot, came away from the meeting feeling more positive about the company’s long-term outlook, he sees plenty of challenges looming in the year ahead.

Once the market stabilizes, Basham says the sales drivers in home improvement should be at least as good as the 3-4% growth rate before the pandemic levels.

And with housing starts ramping up again, the outlook is brightening for professional customers. That group accounts for roughly half of Home Depot’s sales and about a quarter of Lowe’s.

“The Home Depot should benefit materially from continued share gains not just from improving the interconnected customer experience and adding incremental stores, but also from its Complex Pro initiative,” writes Basham.

That effort, which charges a premium for its “one-stop-shop” service, is currently testing in the Dallas market.

And it seems likely the Atlanta-based retailer will be able to replicate its successes in 40 large markets over the next five years.

The success of both stores rests on real-estate sales: People spend more to spruce up a home they want to sell, or to make a new place feel like home. But interest rates are higher and supply is scarce. And while price increases have cooled, housing costs have risen 40% since the pandemic. That, combined with student loan repayment kicking in for many younger home-buyers, is taking more cash out of their housing budget.

Lowe’s execs aren’t worried. Oppenheimer & Co. hosted a call for investors with Marvin Ellison, Lowe’s chief executive officer, and Brandon Sink, its CFO.

“Management remains decidedly upbeat toward intermediate to longer-term demand prospects for Lowe’s and the broader home improvement sector,” writes Brian Nagel, who follows the company for Oppenheimer.

America’s housing stock is aging, and people have more home equity. And many have locked in lower interest rates.

Still, consumers are more cautious, and Lowe’s says they are delaying larger-ticket, more discretionary purchases.

And Morningstar predicts a 4.5% decline in owner-occupied improvement spending this year.