Could Home Depot snatch up home improvement market share?

Tue, Feb 20, 2024, 3:53 PM

"We expect the home improvement sector to decline, low single digits, in 2024. And then we do think that Home Depot picks up some market share, but overall... despite mortgage rates coming down by roughly 100 basis points, looking at some of the real-time data, we haven't really seen any sort of a pickup in existing home sales whatsoever, just given such tight inventory..." Rakhlenko says.

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

JOSH LIPTON: CEO Ted Decker telling analysts on the earnings call that higher for longer interest rates are expected to weigh on consumer demand. But even with that near-term pressure on the industry, TD Cowen maintains an outperform rating on Home Depot stock. Joining us now is Max Rakhlenko. TD Cowen Director, Retail Luxury.

Max, it's good to have you on the show. Maybe just to start, Max, listen, you've had time to look over the report, give us just your reaction, your response to those results.

MAX RAKHLENKO: Great. Thanks a lot for having me on this afternoon. So results 4Q were broadly in line with expectations. Same-store sales came in a little bit above as did EBIT margin compared to what Street was looking for. The 2024 outlook was a little bit softer. Company is looking for same-store sales down about 1%. We were looking for a little bit better.

We think that the guide is broadly in line with what investors were looking for. We think that it's relatively conservative, potentially setting up for beats and raises if the year shapes up a little bit better than expected.

JULIE HYMAN: Overall, though, when you look at what's going on in the housing market, we keep getting data that's not terribly encouraging, right? So overall, are we looking at a home improvement sector that-- you know, it sounds like you're a little optimistic for upside. But right now, we're seeing it under some pressure.

MAX RAKHLENKO: Yeah, certainly. So we expect the home improvement sector to decline low single digits in 2024. And then we do think that Home Depot picks up some market share. But overall, you're absolutely right. Despite mortgage rates coming down by roughly a hundred basis points, looking at some of the real time data, we haven't really seen any sort of a pickup in existing home sales whatsoever, just given such tight inventory.

The hope is that inventory does pick up as the year goes on. And if we can get some rate cuts in the second half of the year, that should set up for a more favorable 2025. But in general, it is that sort of debate around when will existing home sales pick up and in the lag. And then eventually, we should see a little bit of an acceleration in home improvement.

JOSH LIPTON: And, Max, I'm also interested just look at this stock, it's had a nice recent run, Max. It's up about 25% since early November. How does valuation look to you here?

MAX RAKHLENKO: So valuation right now is a little stretched, both compared to lows, that relative multiple, as well as the S&P. We do see upside to where estimates are for the next several years. So we think as topline and margins continue to recover, valuation will sort of get to a little bit more of a normalized level. But where we are sitting today, it's certainly towards the higher end of the range.

JULIE HYMAN: So if we're overall looking at a single digit growth rate for home improvement, and you got your Home Depot and you got your Lowe's, which one should investors be looking to add in that environment?

MAX RAKHLENKO: Sure. So we prefer Home Depot to Lowe's. One of the top reasons why we prefer that is, especially in the near term, Home Depot has a lot more exposure to the professional channel. So at Home Depot pro is about 50% of sales. At Lowe's, it's only about 25% of sales. So therefore, as we model 2024, we do expect better trends at Home Depot because that pro market does actually remain more resilient than what we've seen in DIY.

In DIY, the real problem is the discretionary big ticket purchases. People are really pulling back on it. You spoke previously to higher rates as well as some of the other consumer headwinds. So we expect for the pro-business to continue to outperform. And with that, we do expect better trends in 2024 at Home Depot than Lowe's.

JOSH LIPTON: Max, thanks so much for joining us today. We appreciate it.

MAX RAKHLENKO: Great. Thanks for having me on.

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