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Home-Improvement Retailers Raise the Roof

For several quarters now executives at

Home Depot

HD -0.04%

and

Lowe’s

LOW -0.49%

Cos. have faced the same old question: Just how much more can consumers spend on their homes? The answer has been consistent: More than you would think.

Home Depot’s comparable sales increased 31% in the quarter ended May 2 compared with the year-ago period—its highest growth rate since the pandemic began. It was an easier year-over-year comparison for the retailer because sales growth was muted in the 2020 period when Covid-19 put more of a damper on its urban-weighted store footprint. Lowe’s comparable sales rose by 25.9% in its quarter ended April 30, which was a slight slowdown compared with the prior quarter’s 28.1%. Both retailers beat Wall Street expectations handily on their top and bottom lines, with net income for Home Depot and Lowe’s surging 84.6% and 73.6%, respectively.

The two retailers’ results seem to dispel some bearish theories around consumer behavior. One fear was that rampant inflation in raw materials would motivate consumers to postpone or cancel projects. A sheet of lumber product that was priced at $9.55 at Home Depot roughly a year ago had quadrupled in price to $39.76, the company noted in its Tuesday earnings call. Still, lumber was among the top-performing categories for both Home Depot and Lowe’s last quarter.

Another concern was that strong demand from do-it-yourself consumers would wane quickly because much of it was driven by fleeting pandemic habits. That doesn’t seem to have been the case so far, with DIY demand still growing at a healthy pace, though both retailers reported even stronger demand from professional customers.

Both companies’ share prices fell after they announced blowout results, just as they have for the past few quarters despite consistently topping expectations. Investors can’t seem to shake the concern that the music might stop abruptly as consumers shift their attention and spending away from their homes.

Yet signs point to lasting structural demand for home renovation and repairs. One encouraging sign is that sales growth has been consistent across different regions, whether they had high vaccination rates or not. Lowe’s Chief Executive

Marvin Ellison

said on a Wednesday morning earnings call that the sales performance was “more consistently broad-based” across markets than any other time in his career.

Outside indicators paint a bullish picture, too. Higher home prices today are supported by a real supply-demand imbalance, which implies lasting strength in prices. That can be a catalyst for continued spending: Existing homeowners are likely to feel that the investments are worth it, while sellers could look to renovate and flip homes with a higher sticker price. An April 15 forecast from the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University showed that spending on renovation and repairs is expected to increase at rates higher than year-ago levels through the end of 2021. The program uses several economic indicators that have had strong correlations with remodeling spending, including the home-price index, housing starts and remodeling permits.

After reaching their respective historic highs earlier in May, Home Depot and Lowe’s have given back some gains. Home Depot now trades at 22 times forward 12-month earnings, while Lowe’s fetches 18 times. Both are only slightly higher than their respective five-year averages.

Home prices look ridiculous. By comparison, home-improvement retailers seem affordable.

Demand for lumber has skyrocketed during the pandemic, sending prices to all-time highs. This video explains what’s driving the lumber boom, who’s profiting, and why those growing the trees aren’t reaping the benefits. Illustration: Liz Ornitz/WSJ

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Appeared in the May 20, 2021, print edition as ‘Home-Improvement Retailers Raise the Roof.’