Home improvement trends for US equity investors

Interviews were held with a former director at Lowe’s, former VP at The Home Depot, and a former regional manager at The Home Depot. Third Bridge Forum is part of Third Bridge’s integrated research offering that also includes Community, Maps, and Primers and Tearsheets.

Lowe’s – DIY Category Strengths & Weaknesses & Q1 2023 Update  – Former director at Lowe’s Companies Inc

• Given the US’ “continuous lack of supply for housing compared to the overall demand”, a former director at Lowe’s believes the company will “double down” on its professional services segment, which they described as “an area of growth”. 
• Lowe’s pro loyalty programme has been well-received, they added. We also heard Lowe’s is “significantly more insulated” than Home Depot in maintenance, repair and operations, with the latter more exposed to commercial real estate.

North America Home Improvement – Q2 2023 DIY Demand Softening & Pro Backlog Update – Former VP at The Home Depot 

• Contributing to the DIY demand downturn is the normalisation of larger and bulkier purchase trends in heavy appliances and outdoor equipment – categories with inherently longer-span refresh cycles, according to a former VP at The Home Depot.  
• Abnormal weather patterns have pressured retailers, we also heard, particularly in California and Midwestern markets. Store traffic and weather trends through May indicated slight upward improvements, likely attributable to adapted inventory forecasting following a difficult winter.
• Early summer season performance will heavily dictate performance through the rest of H2 2023, with pressure on Pro and DIY expected in Q1 2024.

Equipment & Tool Rental Market – Home Depot’s Competitive Positioning & Outlook– Former VP at The Home Depot Inc

• The Home Depot remains restricted to medium towable-sized equipment rentals based on existing capacity and infrastructure of its rental facilities, a former VP at the company said. 
• Expenditures required for retrofitting existing facilities or establishing newer centres suitable for heavy equipment is not seen as attractive – the return on invested capital timespan would be considerable with a significant short-term hit to Home Depot’s margin, we were told.
• For rental-driven revenue, Home Depot should expect slower 2-3% comps YoY, as the business has a strong correlation to the Pro services segment, which has seen demand normalisation through 2022-23, our expert said.

Home Depot – Pro Services Backlog Demand Update & Q1 2023 DIY Consumer Trends – Former regional manager at The Home Depot 

• On the Pro segment, a former regional manager at The Home Depot said higher-ticket discretionary items in categories such as patio and grilling have historically represented upwards of approximately 25% of same-store sales for the company, with considerable upticks in spring. However, these categories are exhibiting less favourable elasticities in the face of inflation.
• Meanwhile, additional weight on top lines may come from a decrease in installation-related services as higher-ticket appliance demand continued to shrink through H1 FY23.
• The Pro segment’s project bookings will likely extend through Q4 2023, accounting for historical cancellation rates. H1 cancellation rates for booked projects will be a key metric to assess, we were told.
• Home Depot remains much more attractively positioned vs Lowe’s, according to our specialist, given its greater depth of private label across DIY, ability to sustain aggressive pricing, and general lesser dependence on specialty product-purchasing DIY consumers.