Home Centers – Further Declines in Turnover to Bring Easing of Home Improvement Spending in Coming Quarters

Dan Oppenheim
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SEE LAST PAGE OF THIS REPORT Dan Oppenheim , CFA

FOR IMPORTANT DISCLOSURES (415) 889-5617

doppenheim@ssrllc.com

November 13th 2018

Further Declines in Turnover to Bring Easing of Home Improvement Spending in Coming Quarters

  • HD’s 3Q18 results largely in-line, but further declines in turnover point to slowing ahead. Home Depot’s (HD) 3Q18 operational results were largely in-line with expectations, with same-store comps up 5.4% in the US. However, given that existing home sales continue to slow – our market checks indicated slower closed sales in October, and a sharp decline in pending sales in many markets, especially west coast markets (HD having more exposure to the west coast than LOW). (These lower pending sales will likely impact closed/reported sales in November and December.) As existing home sales typically lead home improvement by four-to-five quarters, we would expect to see easing comps sales trends in upcoming quarters. Even with recent declines in home center stocks, we continue to see risk as expectations have not fully incorporated the slower environment.
  • Decelerating growth during 3Q18, but some due to hurricane-related spending in 2017. Same-store comp growth decelerated over the quarter (up 7.5% in August, 4.5% in September, and 4.2% in October), but some of the sequential deceleration related to hurricane-related spending in 3Q17, with management’s commentary indicating hurricane-adjusted comps of 6.9%, 5.3%, and 5.4%, respectively. 4Q18 comp growth will likely be more modest, as a result of the significant hurricane-related spending in 4Q17 ($380 million of sales, or 1.7% boost to sales in 4Q17)
  • Big ticket sales growth strong, but down slightly from 2Q. HD noted that big-ticket sales (sales in excess of $1,000) increased 9.1% yr/yr in 3Q18, down slightly from 10.6% yr/yr growth in 2Q18. We would expect these big-ticket to cool, given the deceleration of price appreciation and shifting sentiment toward housing.
Exhibit 1: Falling Existing Home Sales Point to Slower Home Improvement Spending, with Downside Risk
Source: Joint Center for Housing Studies, National Association of Realtors, and SSR analysis

 

Exhibit 2: SSR’s Preference for Housing-Related Sectors

 

 

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