Why everyone is worried about Lowe’s and Home Depot ahead of earnings

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As home improvement retailers’ first-quarter results approach, analysts are becoming more cautious about stocks, a marked change from pandemic-era enthusiasm.

On Friday, Baird analyst Peter Benedict cut his price target on

Home deposit

(ticker: HD) at $320 instead of $340, and its goal on

Lowe’s

(LOW) to $225 from $235, while maintaining an outperform rating on stocks. The move comes as it also lowered its estimates for comparable sales and earnings per share for the first quarter, due to “decelerating demand indicators and a late start to spring.”

The latter has also been an issue for other retailers:

tractor supply

(TSCO), whose core business is adjacent home renovations, highlighted the wet and wild weather in its recent results.

And while it’s likely a temporary headwind as milder summer weather lingers on, it’s telling that Benedict hasn’t raised its second-quarter comparable sales forecast to reflect a simple change in those expenses; instead, it kept its estimates unchanged “in a nod to widening macroeconomic pressures on the consumer.”

These pressures are what are contributing to this drop in demand, as evidenced by data showing more modest spending on home renovations in recent months.

Benoît is not the only one to moderate his expectations regarding the upcoming results of retailers. Last week, Roth MKM analyst David Bellinger also cut his estimate of what he expects to be a “weak first quarter” for

Home deposit

And

Lowe’s
.

In fact, consensus estimates for Home Depot’s first-quarter earnings per share, due Tuesday, were down 1% over the past week, according to data from

set of facts
.

This is part of a steady downward trend, with average analyst estimates for the quarter down more than 7% in the past three months and nearly 10% in the past six months. Expectations for Home Depot’s annual earnings are falling.

The situation at Lowe’s doesn’t look much better: Consensus earnings-per-share estimates for the first quarter are down 0.6% in the past week, after falling nearly 5% and 9% in the past three and six months, respectively. As with Home Depot, analysts also resumed their full-year earnings expectations.

Analysts’ concerns are reflected in the market: Home Depot shares are down about 9% year-to-date, while Lowe’s gain of about 2% in 2023 poorly tracks the market rally, approaching 8%.

The problem isn’t just a weaker housing market, as it may actually help home improvement retailers by encouraging homeowners to renovate rather than move. On the contrary, the pandemic tailwinds of soaring home sales and increased time spent at home – both catalysts for spending money on home repairs – have abated along with inflation and rising interest rates dampen consumer appetite for big projects. Lumber prices, which have also skyrocketed in recent years, have fallen, adding new barriers to comparable company sales.

That said, more modest expectations could make it easier for home improvement retailers to cross a lowered bar, which many other companies did this quarter. Although retail reporting season won’t begin in earnest until next week, so far more than 90% of the S&P 500 market capitalization has already delivered results, and nearly three-quarters of companies have exceeded consensus earnings estimates of 6.6% on average, according to data from

Swiss credit
.

Still, stocks could move more on companies’ outlook than their earnings, given investors’ concerns about what a post-pandemic new normal looks like. Home Depot and Lowe’s each reported strong fourth-quarter results earlier this year, but fell on their conservative guidance.

Write to Teresa Rivas at teresa.rivas@barrons.com