Home improvement retailers The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW)’s shares are down by more than 14% over the past year. The housing market continues to undergo a period of turmoil as 30-year fixed mortgages have remained volatile and fluctuated between 6% to 6.8%. Additionally, supply is constrained as, according to WSJ, 80% of mortgage holders have rates below 5%. While housing supply remains low, demand still persists and has consistently pushed median prices to higher than $400,000. Cramer discussed the two firms and was mixed about his preferences:
“Yeah, I mean, now, we don’t have Ted Decker. He’s not well right now. . .I think that Home Depot is not getting a lot of credit for its renovation business. Which was a series of acquisitions that they made. I don’t think it’s so expensive that we should avoid it. That said, the man who is doing better, and I like, go back and forth with him, is Marvin Ellison. So Lowe’s has a better, the individual is doing better than the professional. But I actually like both, because they’re down so low. . .”
Starting with The Home Depot, Inc. (NYSE:HD), Cramer made these remarks on the 17th, a day before the firm reported its fiscal second quarter earnings report. On the 19th, the shares closed 2.9% lower. The results saw The Home Depot, Inc. (NYSE:HD) post $47.8 billion in revenue to indicate 5.7% in annual growth. Additionally, the firm’s diluted per share earnings of $4.92 beat analyst estimates of $4.83 to indicate that the firm was growing and managing its costs. The former assumption was strengthened by its CFO commenting that the firm was gaining market share in a tough market.
As for what Cramer said, estimates have also suggested that professional customers account for 50% of the firm’s consolidated revenue. Yet, customer transactions for The Home Depot, Inc. (NYSE:HD) fell by 1% in fiscal Q2 while the average ticket dropped to $90 from $92.50 to indicate that consumers were only spending when they absolutely had to. Similarly, the firm is facing tightness in the cost front as its operating income growth of 4.3% lagged revenue growth. As per Morningstar, The Home Depot, Inc. (NYSE:HD)’s shares are also trading at the high end of its forward P/E historical average that creates additional pressure on the shares and the firm to deliver in a tough market.
Shifting towards Lowe’s Companies, Inc. (NYSE:LOW), the debate also surrounds whether the firm’s online and professional businesses can offset the impact of a weak housing market. The shares closed 2% higher on the 19th after it reported its earnings in the morning. Lowe’s Companies, Inc. (NYSE:LOW)’s revenue growth of 8.3% outpaced HD’s while its online sales jumped by a much stronger 15.7%. Estimates have suggested that the firm’s Pro segment has achieved consistent double digit growth.
Yet, cost pressures were also evident for Lowe’s Companies, Inc. (NYSE:LOW) as its gross margins dropped by 77 basis points while its operating margin dropped by 81 basis points. Similarly, with estimates suggesting that 70% of the firm’s sales comes from regular consumers, high inflation also carries risks to topline growth. Similarly, the mortgage lockup discussed earlier also constrains consumer spending – softness which might be reflected in the firm’s 5.1% global comparable sales decline.
As for the hedge funds, 100 funds tracked by Insider Monkey had held a stake in HD while 66 had held a stake in LOW. The former’s forward P/E ratio was also higher at 23.20 compared to the latter’s 17.39. For Lowe’s Companies, Inc. (NYSE:LOW), short interest as percentage of float was 2.24%, higher than HD’s 1.37%
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Disclosure: None.
