Home Depot and Lowe’s earnings: Same-store sales could be ‘messy’ due to government shutdown, weather

The home improvement retailers Home Depot Inc. and Lowe’s Cos. are scheduled to report fourth-quarter earnings on Tuesday and Wednesday, respectively, and while analysts expect difficult comparisons, 2019 is shaping up to be a good year for remodeling.

The remainder of 2018 was a tough one for housing, but Stifel analysts think repairs and remodeling was solid, which should continue this year.

“There was some softness in late 2018 with the stock market decline, higher rates, tariff talks, but overall demand appears intact,” Stifel wrote.

The Joint Center of Housing Studies at Harvard University put out its Leading Indicator of Remodeling Activity on Jan. 17, forecasting 5.1% growth in 2019, though that’s down from 7.5% growth in 2018. Homeowners spent $337 billion on improvements and repairs last year, which is expected to decline to $354 million this year.

“Home Depot and Lowe’s face tough year-over-year comparisons in Q4 that included hurricane-related sales and a strong year ago December that was negatively impacted by weather in 2018,” wrote Wells Fargo analysts in a note. Analysts said fourth-quarter same-store sales could be”messy.”

“January (which is a smaller month) could also see impacts from the lengthy government shutdown (and associated lower consumer confidence), and less favorable weather that may have resulted in traffic/sales shifting to Q1.”

Stifel rates Home Depot HD, +0.26%  shares buy with a $200 price target, and Lowe’s LOW, +0.33%  shares hold with a $96 price target.

Wells Fargo rates Home Depot shares outperform with a $200 price target, and Lowe’s stock outperform with a $110 price target.

Home Depot has an average overweight stock rating, according to 34 analysts polled by FactSet, with a $202 price target.

Lowe’s also has an average overweight stock rating and an average price target of $110.55, based on 32 analysts polled by FactSet.

Here’s what else you need to know:

Earnings: FactSet expects Home Depot to report earnings per share of $2.16, up from $1.68 last year.

Estimize, which crowdsources estimates from analysts, fund managers and academics, expects EPS of $2.20.

For Lowe’s, FactSet expects EPS of 79 cents, up from 74 cents last year. Estimize is forecasting EPS of 83 cents.

Sales: FactSet expects Home Depot sales of $26.58 billion, up from $23.88 billion last year. Same-store sales are expected to increase 4.5%.

Estimize is expects sales of $26.57 billion.

FactSet is forecasting for Lowe’s sales of $15.75 billion, up from $15.50 billion the previous year. Same-store sales are expected to grow 2.1%.

Estimize is guiding for revenue of $15.84 billion.

Stock price: Home Depot shares have gained 13.6% over the past three months, and 3.7% for the past year.

Lowe’s stock is up 19.7% for the last three months, and up 9.2% for the last 12 months.

The Dow Jones Industrial Average DJIA, +0.66%  has rallied 6.4% over the last three months and 4.3% over the past year.

The S&P 500 index SPX, +0.57%  is up 5.4% for the last three months and up 3.3% for the last year.

Other items:

Tax refunds: Stifel thinks tax refunds could be an issue, with many people angered by a lower return in 2019.

“Now it is still early to say if this is representative of the whole refund season – the amount of returns received by February 1 compared to last year is down 12% and the amount of returns processed is down 26%, most likely due to a slowdown from the government shutdown,” analysts said.

Lowe’s has set itself up for success: “We believe Q4 actions (closings, etc.) clear the deck for Lowe’s self-help initiatives to take hold in 2019, and should progress materialize, we see a path to improving comps, 12% EBIT margins, and valuation re-rating,” wrote Wells Fargo.

“In our view, the potential for improvement remains vast, an achievable FY19 bar has been set, and we see ample levers for management irrespective of a slower housing market.”

JPMorgan analysts have a favorable view of Lowe’s management team, particularly Chief Executive Marvin Ellison, but say company efforts to take time to yield results due to “deficiencies” in the supply chain and IT.

“We believe moderating growth in home improvement spending and the major management overhaul and necessary investments/operational changes make owning the second player in the category risky,” analysts said.

“More specifically, though we like the new team that has been assembled, still see the category growing in 2019, and view the sector as one of the best positioned in retail from a competitiveness vs. Amazon perspective, we believe the company will need to invest, creating risk to consensus operating income estimates.”

JPMorgan rates Lowe’s shares neutral with a $104 price target.

Home Depot is one of the best for the long-term: JPMorgan is bullish on Home Depot based on the retailer’s sales, margin initiatives, immunity to Amazon.com Inc. AMZN, +0.70%  encroachment, and other factors.

“With internal momentum building, we expect Home Depot to benefit from its refocused branding and value proposition, which has driven favorable traffic and ticket trends at the retailer,” a note said.

JPMorgan rates Home Depot stock overweight with a $203 price target.

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