When the coronavirus pandemic broke out, many Americans not only switched to remote working and cooking more meals, but also started checking off tasks on their to-do lists, from painting walls to replacing old appliances.
Home Depot and Lowes reported that home improvement appetites persisted in the third quarter as consumers invested in one of the aspects of life that brought convenience: their home. Both companies expect this trend to outlast the pandemic.
The surge in DIY projects and renovations resulted in a surge in sales on the internet and in stores. Home Depot sales in the same store in the United States, including online sales and sales that have been open for at least 12 months, rose 24.6% in the quarter. Lowe’s sales in the same store, including online sales and sales in stores that have been open for at least 13 months, jumped by approx. 30%.
As with other retailers, businesses have shifted towards online spending – many customers pick up their purchases by the roadside.
Home Depot’s digital sales grew 80% year over year – and customers took about 60% of those orders in stores, said company CEO Craig Menear.
At Lowe’s, digital sales more than doubled, up 106% year over year.
However, the companies did not share sales figures, which makes it difficult to compare the companies’ total ecommerce sales. It should be noted, however, that Home Depot’s efforts to build its online business began earlier than Lowe’s.
Despite the strong sales growth, investors sold both stocks in the wake of their earnings releases. Home Depot stocks, which recently traded at around $ 269, are up 23% year-to-date, but widened the gap with their 52-week high of $ 292.95 in late August. Lowe’s shares hit a 52-week high of $ 180.67 last month, but are now trading at around $ 150. Despite the decline, the stock is up about 25% from January.
With the pandemic disrupting almost every aspect of life, Richard McPhail, Home Depot’s chief financial officer, said people have a “nesting instinct.” He compared it to the mood of Americans after the September 11th terrorist attacks and the housing crisis in 2008.
Many consumers have put money into their home to better fit their lifestyle today. They have converted garages into home offices and gyms, converted kids’ rooms into temporary classrooms, and upgraded the yard to make it a relaxing getaway during a challenging year.
“What we’ve seen is the genesis of the real project – the multi-part, more complex home improvement project that our customer takes into their own hands,” said McPhail.
The strength of the property market has also boosted spending, he said. US housing has increasedas mortgage rates remain at historic lows. As people spend more time at home, some have chosen to move from dense urban environments and in more spacious houses in suburbs or rural areas.
“A healthy housing economy means consumers are willing to spend more on their homes,” McPhail said. “They see their homes as an investment rather than a cost, so they are willing to spend more.”
Home inventory in the US is also aging, said Marvin Ellison, CEO of Lowe. As homes get older, homeowners need to replace worn kitchen appliances or freshen up an outdated bathroom.
Despite the economic impact of the pandemic on millions of unemployed Americans, some consumers feel they have more money by skipping vacations and evenings for dinner. These customers were more willing to dig into big-ticket items like riding mowers and even seasonal decor – like a 12-foot skeleton that broke out and sold out at Home Depot before October.
However, retail competitors differed in terms of their third-quarter profits – also because they were on a different basis at the start of the pandemic.
Home Depot exceeded Wall Street expectations for earnings and revenue. Net sales increased 23% from $ 27.22 billion a year ago to $ 33.54 billion.
Home Depot, with nearly 2,300 stores across North America, has a market cap of nearly $ 290 billion – more than two and a half times Lowe’s. Home Depot sources much of its business from home professionals such as plumbers, electricians and contractors. About 45% of sales come from professionals, the rest from home improvement.
Even before the surge in online shopping during the pandemic, Home Depot had stepped up its investment in e-commerce to make its website search and supply chain faster and cheaper.
Lowe’s, on the other hand, was in the middle of an Ellison-led turnaround as Covid-19 spread across the country. The nearly 1,970 home improvement and hardware stores in the United States have relied more on home improvement business. Historically, around 20% to 25% of sales come from professionals.
When the pandemic started, it was Lowes Redesign of a company website that was called “really clunky” by its own CEO. Added key features such as “one click shopping” and changed the way prices were listed online by breaking down the cost of the item and the shipping cost.
Lowe’s had to balance the cost of long-term business improvement with higher labor costs. In the third quarter, the company invested $ 245 million in assisting its hourly workers in connection with Covid. That added up to more than $ 1.1 billion in the first nine months of the year.
In addition, $ 100 million was spent on store improvements in the third quarter, reorganizing merchandise and assembling supplies for specific projects so that all customers, especially home professionals, can more easily find what they need.
“This is an example that we are not doing this business quarter to quarter,” Ellison told investors on a profit call. “We want to make sure we are making the right investments that have long-term benefits and long-term productivity gains. We believe we do and that will be our focus.”
According to Lowe’s, those investments have already paid off. In the third quarter, the pro business grew by more than 20%. In March a nationwide loyalty program for home professionals to try to advertise them with perks like personalized offers.
Home Depot also had higher labor costs. Menear said on a conference call with investors that the company has spent around $ 1.7 billion on temporary wages and benefits so far this year. He said some of the pandemic-related compensation programs for temporary workers would result in permanent wage increases.
The company declined to disclose the employee salary increase but said it will incur an additional $ 1 billion per year in expenses.
As a company like Pfizer and Moderna announce Progress in developing a Covid-19 vaccineInvestors have a new question for retailers: is the home improvement trend sustainable or will it fade when Americans can go on vacation again? That question was a key factor in why stocks fell on their earnings news.
Home Depot declined to provide an outlook, citing economic uncertainty. Lowe’s issued a forecast for the fourth quarter but was disappointed with forecast earnings, which were below Wall Street’s expectations.
Lowe’s is forecasting earnings between $ 1.10 and $ 1.20 per share, less than what analysts are asking for $ 1.17 per share. Sales growth of 15% to 20% in the same store was forecast.
Despite the many unknowns, McPhail of Home Depot expects the demand for home improvement to remain strong due to the many people who have moved and established a DIY habit.
“We believe that consumer attitudes about what they get from home improvement will change forever,” he said. “Our customers tell us today that the home has never been more important and that they intend to spend more on the home.”
Both companies drove growth opportunities. Home Depot said that earlier this week it will buy back Industrial goods wholesalers HD supply, one of the largest distributors of appliances, plumbing and electrical appliances in North America, valued at $ 8 billion.
Lowes is immerse yourself in new categories of housewares. During this holiday season, for example, small kitchen appliances such as air fryers, leisure items such as children’s scooters and trampolines and exercise equipment are sold. Lowe plans to test exercise machine displays in select stores early next year.
Ellison said the wear and tear will continue to lead to purchases. About two-thirds of the retailer’s sales are non-discretionary, such as replacing a defective water heater.
Currently, companies are focused on supplying fresh Christmas trees, selling fairy lights and other merchandise during the holiday season. Spring is the main home improvement season, but home-stay trends could make the holidays another bright spot.
And McPhail added that more people want to see power tools under the tree as more people get into home projects.