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Housing Is Hard To Come By, And That’s Good News For Home Depot

(Source: www.forbes.com)

As home prices continue to tick up amid a housing stock shortage, Americans look to be doubling down on remodeling and other home spending. Just look at Home Depot’s results.

The largest U.S. home-improvement retailer posted better-than-expected fiscal second-quarter earnings on Tuesday as its sales rose 8.4% to $30.5 billion. U.S. comparable sales also topped expectations with an 8.1% jump.

Perhaps even more telling about the demand for renovations and repairs: Big-ticket transactions of over $1,000, one-fifth of Home Depot’s business, shot up 10.6%, driven by demand from professional contractors and for products including vinyl-plank flooring and appliances, Ted Decker, who heads merchandising at the Atlanta retailer, said on the earnings call Tuesday.

In total, the average receipt amount rose 4.9%, and the number of comparable transactions, an indicator of traffic, rose 2.9%.

“We saw a healthy balance of growth from both our Pro and DIY categories, with Pro sales once again outpacing DIY sales in the quarter,” president and CEO Craig Menear said on the call, adding that Home Depot saw “broad-based strength across the store and all geographies.”

Home-improvement retailers, including Home Depot and rival Lowe’s, have outperformed the broader retail sector in both profit and sales for the most part since 2012, Retail Metrics data shows. The sector has also appeared relatively more Amazon-proof even as online spending has increased in the category. Home Depot said online traffic rose 26%, but 47% of its online orders were picked up in stores. The company has also rolled out express small parcel delivery from stores via vans and cars.

“Home-improvement stores provide project management advice and crucial knowledge DIYers cannot get on Amazon or YouTube,” Retail Metrics president Ken Perkins told me. “Home-improvement stores’ product lines are more heavily geared toward click-and-collect transactions, which favor them over Amazon.”

While Home Depot benefited partly from what Menear described as the “bathtub effect” — bad weather in Q1 delayed spring garden and outdoor spending until Q2 — Home Depot said it also saw strong spending on repair and remodeling projects. Sales to professional contractors jumped at least 10% as they bought items including lumber, power tools, in-stock kitchens, windows and concrete.

Meanwhile, DIY customers didn’t just spend on lawn mowers and other spring projects. They also shelled out for interior paint and “core maintenance and repair categories,” including water heaters.

“We didn’t just recover seasonal sales,” CFO Carol Tome said. “As we look to the back half of the year, we continue to expect strong economic growth with the backdrop of a healthy home improvement environment. Homeowners continue to enjoy home price appreciation, and rising wages and low unemployment have driven consumer confidence to record high levels. These trends are all supportive of our business.”

Potential Headwinds

To be sure, it remains to be seen how the headwinds facing the broader housing market may affect Home Depot and other retailers. Inflation, for one, is a concern. Part of the higher average receipt last quarter, for instance, came from higher commodity prices in lumber, building materials and copper, and Home Depot said it’s now seeing inflation in other areas.

“These inflationary pressures come in many forms, including rising raw material costs and transportation costs, along with recently enacted tariffs,” Decker said.

Indeed, U.S. tariffs levied on lumber imports from Canada are adding to the rising construction costs and threatening to make homes even less affordable, according to the National Association of Home Builders. The second-quarter housing affordability rate — thanks to rising home prices and interest rates — has hit a 10-year low, according to the NAHB Wells Fargo Housing Opportunity Index released last week.

The study found that Q2 U.S. national median home prices rose about 5% from Q1, to $265,000 — the highest quarterly median price in the history of the index. Q2 average mortgage rates jumped by more than 0.3 percentage points from the first quarter, to 4.67%, according to the study.

“Rising household formations, along with a strong economic expansion in the second quarter that has fueled job growth, will support housing demand in the second half of 2018,” NAHB chief economist Robert Dietz said in the study. “However, growing trade war concerns and the expectation of higher mortgage rates are additional headwinds negatively affecting housing affordability.”

According to the National Association of Realtors in a July report, existing-home sales fell for a third straight month in June as the “ongoing supply and demand imbalance helped push June’s median sales price to a new all-time high.”

Don’t expect new construction to relieve the housing shortage, either: Commerce Department data showed June housing starts dropped about 12% from May, reportedly to a nine-month low.

The confluence of factors looks to be making American consumers want to spruce up their owned or rental homes, either to live more comfortably (since they don’t have another place to move to) or perhaps to sell their homes at a premium. NAHB Remodelers forecast in January “below-normal rates of home building that’s creating an aging housing stock” will drive up home improvement spending by about 5% this year, after it topped $152 billion last year. And several studies have shown that Americans are spending more time at home, again boding well for home-related spending.

“If there is a bias in the forecast, based on the economic environment and our August performance to date, the bias is to the up,” Tome, the CFO, said on the call Tuesday.

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More Info: www.forbes.com

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