Lowe’s, Home Depot Shrug Off Inflation Fears

Homeowners resistant to economic headwinds, execs say

By Alan Wolf, YSN

Wednesday’s thousand-point market selloff was triggered by mixed Q1 earnings reports from a handful of big-box chains.

Investors interpreted spotty earnings and lower same-store sales as a harbinger of a mass consumer retreat. But rather than see it as a broad pullback in spending, retailers attributed the dips to rising gas prices, steep labor costs, and a cold, rainy spring that cut into sales of outdoor grills and other seasonal fare.

Particularly unruffled were the twin giants of the home improvement channel. While acknowledging the backdrop of higher prices and a still mending supply chain, Lowe’s and The Home Depot downplayed the impact of inflation and mounting interest rates on their (and BrandSource dealers’) core customer: homeowners.

In respective earnings calls with analysts, the chains’ senior management teams argued that home ownership is an effective cushion against current shocks to the economy, and that investment in what is likely the biggest asset for these consumers will continue.

“Despite some increased uncertainty in the macro environment, our long-term outlook for the home improvement industry remains positive,” said Marv Ellison, chairman/CEO of Lowe’s. “Homeowner balance sheets are very strong, and their confidence to purchase big-ticket items is supported by continuing home price appreciation.”

Ellison pointed to additional factors, including the extension of remote work, millennial household formation, and baby boomers’ preference to age in place, as “long-term tailwinds” for household upgrades.

Richard McPhail, CFO of The Home Depot, sounded a similar narrative. “Over our history we’ve seen that home price appreciation is the primary driver of home improvement demand,” he told analysts. “When your home appreciates in value, you view it as a smart investment and you spend more on it.”

McPhail further broke it down. “Home equity values have increased by 40%, or over $7 billion just in the last two years,” he said. “The homeowner has never had a balance sheet that looks like this. They’ve seen the price appreciation, and they have the means to spend.”

The CFO also cited customer surveys indicating that shoppers’ homes have never been more important to them, and that their intent to do projects of all sizes has never been higher — a fact that is affirmed by the backlog of remodeling jobs, as reported by contractors, he said.

McPhail also dismissed the quelling effect of rising interest rates, arguing that they in fact work in favor of the home channel. Roughly 93% of home mortgages are fixed rate, he noted, meaning that most homeowners are indifferent to costlier loans. If anything, those considering moving are “more and more tempted to stay in their low fixed-rate mortgage and remodel their home instead,” he said. “So, these low locked-in mortgages are probably a benefit to an improvement.”