In our previous article on the two home improvement retail giants Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW), we explained how high levels of unemployment in the U.S. have dragged on the companies’ earnings results since 2009 and how that might continue if the the fiscal deficit issue is not addressed properly. With the fiscal cliff issue resolved and economic data looking more supporting, we believe this will benefit the U.S. housing market, which will help Home Depot and Lowe’s.
The economy is definitely looking better now with official estimates pegging year-end unemployment levels for 2013 at 7%. This would be a marked improvement over 2012 when the country ended with nearly 8% unemployment.  We believe there are a few reasons this will help Home Depot and Lowe’s.
One of the consequences of the recession was that more people lived in ‘doubled-up households’ where an adult in addition to the existing resident, not included spouses or partners, lived under the same roof. With the economy recovering, we should see more of these individuals moving into their own residences. If unemployment were to decline from its current levels (around 7.8%) to the 7% mark, we could see the total pool of employed people increase by as much as 2.5 million.
This benefits home improvement retailers in two ways. First, the newly employed will fuel demand for new housing. Our estimates for the demand for new homes is in the range of 800 thousand to 1 million. Much of this will be catered to by the existing inventory of houses up for sale, but will also fuel new constructions and housing starts in 2013 – a key source of sales for Home Depot and Lowe’s.
Second, rising employment will also add to the household’s purchasing power, driving per house spend on home improvement products. Add to this the opportunity to supply repair-related items, especially in the wake of the damage caused by Hurricane Sandy last year, and we have reason to believe that 2013 will be a much better year for Home Depot and Lowe’s.
Home Depot’s annual revenues for 2011 stood at around $70 billion, making it the largest home improvement retailer in the U.S. Lowe’s stood second with revenues of $50 billion. We expect the respective top-lines to cross $75 billion and $53 billion in 2013 if the U.S. employment scenario does move in the positive direction.
We have a Trefis price estimate of $59 for Home Depot’s stock, which is 7% below the current market price. We will be revising this estimate shortly.Notes:
- “Fed’s Plosser: U.S. unemployment to fall under 7 percent by end – 2013“, Reuters, January 2013 [↩]