Aging homes with higher values could help Home Depot and Lowe’s this spring

Spring has already arrived at some Home Depot and Lowe’s stores, as the companies roll out displays of backyard grills, lawn and garden supplies and power tools.

The retailers are gearing up for the home improvement industry’s peak selling season: Warmer weather months when homeowners and contractors tend to tackle more projects.

Yet the change of season is not the only factor driving demand. The country’s aging housing stock is forcing homeowners to replace roofs or burst pipes — and rising real estate values are inspiring some to splurge on additions or remodels after seeing a neighbors’ house sell for a high price. About half of single-family homes in the U.S. were built before 1980, according to data from the Federal Home Loan Mortgage Corporation. Home price appreciation averaged 15% for the full year in 2021, more than double the 6% appreciation the year earlier, according to CoreLogic.

Zack Fadem, a retail analyst for Wells Fargo, said Home Depot and Lowe’s will go up against “two years of really robust growth” — including two spring seasons with favorable weather in much of the U.S.

“Everybody is trying to get a sense of whether the industry can still grow,” he said. “As we think about where we are today and looking out into 2022, the questions that I think will arise are: ‘How will interest rates impact demand for new homes? Will project demand remain elevated for existing homes? And will the consumer continue to be able to absorb the six to seven percent-plus points of inflation?'”

He said he expects real estate dynamics to keep home improvement spending elevated — even if Americans ditch the pandemic hobby of do-it-yourself projects and hire contractors again.

Another indicator looks promising for the retailers, too: Customers are already buying lawn and garden supplies.

Scotts Miracle-Gro reported a stronger-than-expected fiscal first quarter last week, saying that consumer purchases at its largest retailers rose 9% in dollars and 3% in units versus a year ago, on top of double-digit growth in the year-ago period. Nearly 40% of the company’s total sales come from Lowe’s and Home Depot.

Lowe’s and Home Depot have not shared a forecast for 2022, but could when the two companies report fiscal fourth-quarter earnings later this month.

Home Depot recently named a new CEO. Company veteran and Chief Operating Officer Ted Decker will step into the role in March, but the retailer has not indicated a change in strategy.

In the early months of the pandemic, Americans fought stress and boredom with DIY projects. Then, as they got vaccinated for Covid-19, more hired and invited pros back into their homes for complex projects, such as renovating a kitchen or redoing a bathroom.

Home Depot and Lowe’s have reflected that change with rising demand among pros, lower demand among do-it-yourself customers and higher average tickets.

Since the start of the pandemic, Lowe’s shares have risen 120% and Home Depot’s shares have risen nearly 60%.

Now, retailers must make home projects feel easy — or at least worth the effort and expenses — as more competes for their attention and wallets, said Joe Derochowski, industry advisor of home improvement for The NPD Group, a market research firm that tracks retail sales.

“It’s a competition for time,” he said. “We were very home-centric, and we still will be to a degree, but we will be less each year and as that does, what are they [retailers] going to do? The critical success factor is to help inspire the consumer.”

Derochowski said he expects consumers will still spruce up their outdoor spaces this spring, such as investing in a new deck or pavers as they entertain again. He said he expects more aspirational purchases, like colorful decor and upgrades to rooms that people haven’t yet upgraded like the guest bedroom or laundry room.

“We’re craving not just new, but spice, a pizzazz, an energy,” he said. “We’re craving something that’s even more.”

And he said storage and organization will likely remain hot as people’s homes serve many purposes, from home offices to gyms, and some seek relief from pandemic stress in the form of spring cleaning.

Investors are at odds about whether inflation and rising interest rates could cool Americans’ appetite for renovations in the coming months.

Some investors are betting that demand will level off or decline in the coming quarters, causing stocks of Sherwin-Williams, Lowe’s and Home Depot to drop so far this year and underperform the broader markets.

Wells Fargo’s Fadem, on the other hand, has kept Home Depot and Lowe’s price targets high. His price targets are $460 for Home Depot shares and $295 for Lowe’s shares, which is 28% and 29% above where the companies’ stocks are currently trading, respectively.

Analysts’ average price target is $277.53 for Lowe’s and $422.16 for Home Depot, as they larely anticipate growth in the coming year.

Home Depot’s earnings are expected to rise to $16.20 per share on revenue of $153.85 billion in fiscal 2022, based on a survey of analysts by Refinitiv. For 2021, analysts are predicting Home Depot will earn $15.50 per share on revenue of $150.18 billion.

Lowe’s earnings per share are expected to increase to $12.94 on revenue of $97 billion in fiscal 2022, compared with an estimated profit of $11.95 per share on revenue of $95.71 billion in 2021.

In warmer climates in the south, Lowe’s and Home Depot have already set up spring displays and will soon add them in other states.

Home Depot is gearing up for anticipated demand with more hiring than usual: It plans bring on 100,000 full- and part-time employees for the season, a 25% increase from previous years. As it competes in a tight labor market, the company said it will throw a virtual spring career day on Feb. 16 and speed up the process so it can make a job offer in as little as one day of applying.

Lowe’s has not announced its spring hiring goals. It has expanded its variety of merchandise, including launching private label decor brands, selling more exercise equipment and testing a mini Petco shop in some of its stores. It has also added website and app features geared toward convenience for DIY customers. One tool is a kitchen planner that allows consumers to virtually choose a design and appliances to envision how the room would look. In March, it will launch a new iPhone-powered tool, Measure Your Space, that scans a room to determine the amount of flooring that’s needed.

Both are also wooing home professionals, which are steadier and bigger spenders — and not as sensitive to factors like the weather.

Lowe’s is offering new loyalty program perks like free snacks, gift cards and even a chance to win a Ford F-Series pick-up truck. Home Depot recently relaunched its own loyalty program for pros.

Home Depot has historically had the edge with those customers, with about 45% of its total annual sales come from pros versus about 20% to 25% at Lowe’s, according to the companies. Lowe’s, however, said in December that it expects its pro sales to grow at double the market rate in the next few years.

Both retailers have said the real estate backdrop is on their side.

Lowe’s CEO Marvin Ellison often cites the statistic that two-thirds of company’s sales are nondiscretionary, such as replacing a broken water heater. Those kinds of repairs are more common if a home is old.

Bill Boltz, Lowe’s executive vice president of merchandising said in a recent CNBC interview that Americans have more to repair and replace due to heavier use of their homes. Plus, he said, limited home inventory and high asking prices mean people may have to make, rather than buy the house of their dreams.

“The wear-and-tear and the lack of housing pushes the consumer to think about ‘How do I improve the living space that I already have?’ — whether I’m adding on, whether I’m remodeling, whether I’m doing something on the backyard,” he said. “So it [home improvement] is really a nice space to be in.”