Home Depot’s Pro exposure cited as key earnings advantage over Lowe’s (NYSE:HD)

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In a busy week for retail earnings, Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) will headline the specialty retail sector’s offerings.

Shares of both home improvement retailers have risen sharply in the past month amid a broader market rebound. Indeed, each stock has pushed to a double-digit gain in just the week ahead of their respective Q3 reports.

Additionally, optimism in the space has been bolstered by a strong report from Tractor Supply Company (TSCO) in late October that highlighted average ticket growth to offset sales volume declines. Further, forecasts into the year-end exceeded analyst expectations.

That said, the year-to-date trend for the overall home improvement sector has been less auspicious. As rising mortgage rates and a roll-off of pandemic-driven DIY demand has hit each stock, analysts have become more wary about further downside risk, with both earnings estimates and ratings reeled in.

“Our downgrade is based on the view that slower [home improvement] demand and disinflation could push comps lower in 2023, making margin gains muted,” a late October downgrade from Evercore explained. “Accounting for the compressed sector forecast, our 2023 LOW and HD comps are reduced by 200bps, with a corresponding reduction in operating margins.”

The firm updated this expectation on Thursday, noting that a “spike in mortgage rates and 3Q softness seen in vendor results” has prompted much of the Street to soften their expectations into the print. According to SeekingAlpha data, Home Depot’s revenue expectations have been cut 22 times in just the past 90 days. Over that same span, Lowe’s has seen the very same number of downward revisions to revenue estimates.

“The housing market, in our minds, does again have some characteristics of a market that has moved too far, too fast spurred on by a very easy Fed,” R5 Capital analyst Scott Mushkin explained in a trimming of his own estimates in October. “With that liquidity reversing with no real end in sight we thought it prudent to move numbers lower.”

Amid about a 20% slide for each stock in the year so far, price to earnings multiples “appear to be baking in a lot of pain,” according to the analysis.

However, many analysts see a much higher probability for Home Depot (HD) to beat the tempered expectations than Lowe’s (LOW). This sentiment is largely predicated upon the higher level of revenue derived from professional customers rather than DIY buyers.

“LOW’s higher DIY mix remains a headwind, in our view,” Evercore’s latest analysis concluded. “We like HD’s Pro exposure, FCF yield, steady dividend hikes and buybacks.”

To be sure, Lowe’s (LOW) has launched a PROvember sales event in order to lure these customers to their locations. Still, weekly foot traffic has continued to trend lower by 11% or more from the prior year, according to Placer.ai. These declines are markedly larger than its chief peer in Home Depot, per the data.

“In recent weeks, Home Depot and Lowe’s year-over-three-year (Yo3Y) visits approached or surpassed pre-pandemic levels,” Placer.ai’s report added. “The week of October 24th, 2022, Home Depot’s Yo3Y visit gap was only 2.6% while Lowe’s Yo3Y visits were 5.1% below the equivalent week in 2019.”

The narrower gap, and brief poke above positive, for Home Depot (HD) is indicative of its catering to Pro customers, per the report. Home Depot (HD) sports a 4.18 out of 5 rating, with 5 representing a strong Buy, from analysts in SeekingAlpha’s aggregated ratings. After multiple downgrades from firms like Cowen and Evercore ahead of Q3 results, Lowe’s (LOW) holds a 4.06 rating representing a less-convicted Buy consensus.

Read more on the earning week ahead.

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