Home improvement retailers Home Depot (HD) and Lowe's (LOW) are scheduled to report results of their second quarters before the market open on Tuesday, August 16, and Wednesday, August 17, respectively. Home Depot's conference call is scheduled for 9:00 am EDT on Tuesday and Lowe's will hold its quarterly call on Wednesday at 9:00 am EDT. What to watch for:
HOUSING MARKET COMMENTARY: Builder confidence plunged in July as high inflation and increased interest rates stalled the housing market by dramatically slowing sales and buyer traffic. In a further sign of a weakening housing market, builder confidence in the market for newly built single-family homes posted its seventh straight monthly decline in July, falling 12 points to 55, according to the National Association of Home Builders/Wells Fargo Housing Market Index released on July 18. This marked the lowest HMI reading since May 2020 and the largest single-month drop in the history of the HMI, except for the 42-point drop in April 2020, the NAHB said. "Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home,” said NAHB Chairman Jerry Konter.
OUTLOOK: In May, Home Depot raised its fiscal 2022 EPS view to up mid single digits from up low single digits and its revenue view to up 3% from up slightly. Comp sales for FY22 are now expected to be up 3%. At the time, Home Depot said FY22 was off to a "strong start."
Meanwhile, Lowe's forecast 2022 EPS $13.10-$13.60, against analyst estimates at the time of $13.38, and revenue of $97B-$99B, against estimates of $98.13B. In May, Lowe's said gross margin pressure was expected to shift into Q2.
TOUGH MARGIN EXPANSION PATH: Citi analyst Steven Zaccone downgraded Lowe's to Neutral from Buy with a price target of $205, down from $222. He is concerned that the weakening macro backdrop, combined with slowing do-it-yourself demand and rising promotional risk, will make the margin expansion path at Lowe's tougher and is using the recent strength in retail stocks to downgrade the shares, Zaccone tells investors. Among the home center names, he prefers Home Depot on its Pro segment strength, said Zaccone, who keeps a Buy rating and $348 price target on Home Depot shares ahead of the company's upcoming earnings report.
EARNINGS REVISION CURVE DETERIORATING: JPMorgan analyst Christopher Horvers lowered the firm's price target on Home Depot to $311 from $335 and keeps an Overweight rating on the shares. The analyst also reduced the firm's price target on Lowe's to $210 from $230 and keeps a Neutral rating on the shares. The "earnings revision curve continues to deteriorate" for most of retail, with the "trifecta of pressures" on the consumer -- inflation, wallet normalization, and slowing housing -- colliding with lapping two years of abnormal full price selling and rising cost pressures, Horvers tells investors in a research note. Reactions to downward estimate revisions "have been more positive lately," which encourages companies to take down guidance, says the analyst.
Q2 'POISED TO MISS': Wells Fargo analyst Zachary Fadem lowered the firm's price target on Lowe's to $220 from $240 and keeps an Overweight rating on the shares. Sentiment is weak, Q2 appears poised to miss, and the second half of the year outlook likely needs a reset, the analyst argues.