Home Improvement Market Is Waiting For The Fed to Cut Rates

Home improvement businesses such as Home Depot, Lowe’s, and Floor & Décor are great businesses.

Five reasons that them special:

1) A massive distribution advantage in a $950 billion fragmented market

2) Substantial advertising resources to reinforce name-brand

3) E-commerce resistant due to SKU complexity & install

4) Perpetual desire for home improvements

5) High return on capital

However, their respective financial results over the past 18 months have been challenged for two reasons:

1) Record Low Existing Homes Sales:

The home improvement market is levered to existing home sales because new homeowners spend significantly more on improvements during year 1 of a new home purchase. However, with existing home sales at some of the lowest levels in the past three decades, the amount of home improvement demand is challenged.

2) Covid related demand pull-forward:

The increased time spent at home, free government handouts, and low rates led to a significant pull-forward in home improvement demand. This unprecedented event adds another layer of uncertainty in trying to figure out a bottom in demand.

At the Company level, these managements are executing well. They are increasing the PRO penetration across the board, making it easier for the PRO to buy materials in bulk. They are adding incremental distribution layers to reduce store inventory and increase the speed of delivery to end customers. They are also increasing the same day delivery capabilities by bringing in Door Dash, Instacart, Shipt, and other providers.

Despite these efforts, SSS were negative in 1Q 24. Both big-ticket and PRO demand remains weak. Ultimately, these businesses are tied to existing home turnover, and home sales will not rebound until mortgage rates decline.

When will Fed Chair Powell come to the rescue?

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