Tailwinds From The Hurricanes To Boost Home Depot’s Sales

by Trefis Team
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Through the first half of 2017, the sales and comparable sales of Home Depot (NYSE:HD) have accelerated. In the second quarter, the comps were up by 6.3%, with those of its US stores increasing at a rate of 6.6%. However, the company’s guidance of a 5.5% growth in comps for 2017 implies a deceleration in the second half of the year. Nevertheless, this figure exceeds those of other retail companies, and Home Depot continues to be a standout player in this sector. The sales growth in the company is expected to come from the improvement in the housing market as well as from the hurricane-related demand. These factors together with fiscal discipline are expected to result in a 13% growth in the earnings per share.

Home Depot Capitalizes on Surge In Demand Caused By Hurricanes

Homeowners face the likelihood of severely damaged properties, as a result of Hurricane Harvey and Hurricane Irma, necessitating the requirement for home improvement equipment and materials. Such a scenario will boost the demand for products of companies such as Home Depot and Lowe’s (NYSE:LOW), which cater to not only the do-it-yourself (DIY) segment, but also to professionals in the home improvement/remodeling and construction space. Moreover, since a majority of the properties in the flood-affected areas are without insurance, people will be forced to pay out of their pockets for the repair work. Hence, a substantial portion of the work can be expected to be conducted by the DIY segment, which is a core customer base for both Home Depot and Lowe’s. Even prior to the storms, the companies had been selling large volumes of small-ticket items such as bottled water, tarps, and straps, as well as larger ticket items like fans, blowers, air conditioning units, and generators.

According to projections by Planalytics, Hurricane Harvey could cost retailers as much as $1 billion in lost sales, with the corresponding figure for Hurricane Irma being $2.75 billion. Home Depot also has to spend a considerable amount of money for its disaster response. Burt Flickinger, managing director at Strategic Resource Group, has estimated that it will cost the retailer $50 million to deal with the hurricanes. However, careful planning and ample preparedness can help Home Depot to see a sales boost. As per Flickinger’s estimations, such an investment undertaken by Home Depot will be repaid 10 to 15 times over in increased sales.

Housing Market Improvement Bodes Well For Home Depot

The housing market has seen a resurgence of late. While things have not returned to the boom times, the number of new houses built last year was the most since 2007. People who buy new homes spend money on improving their homes, installing appliances, buying furnishings, etc. It is not just the new homes, but remodeling of existing houses is also on an upswing. Remodeling activity started on a strong note in 2017, with the National Association of Home Builders’ latest Remodeling Market Index edging higher than the third quarter of 2016. This increasing trend is set to continue in the future, benefiting Home Depot who is heavily reliant on the improvement of this industry.

The growth in home prices seems to be encouraging homeowners to carry out their remodeling investments. Moreover, home sales have been on an upward trajectory, indicative of a healthy sector. These two activities together evince another strong year for the home improvement industry. Homeowners who remodel this year are expected to spend about $6,148 per project, as compared to $5,800 in 2016, according to a National Association of Home Builders analysis of Census Bureau data. The average spending also varies a lot between states, ranging from $2,300 to $22,000, with owners in areas in New York and California spending the most. First-time buyers, who are mostly millennials and baby boomers, are set to drive this growth in the coming years.

See complete analysis for Home Depot’s stock

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking and encourages readers to comment and ask questions in the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Home Depot

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