The Onset Of Hurricane Season Drives Up The Stocks Of Home Improvement Retailers

by Trefis Team
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Home improvement companies Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) seem to be ready for the hurricane season even if the residents are not.  With Hurricane Florence looming on the horizon, consumers have been flocking to grocery and hardware stores to stock up on the necessary supplies. Once such a storm is spotted, the home improvement companies alert their stores in the potential strike zone, and start mobilizing resources to that area. A majority of these supplies reach the stores through distribution centers, which have been pre-loaded with hurricane supplies well ahead of the hurricane season, in order to aid the customers to prepare better for the storm. In the aftermath of the devastating hurricanes, the focus will turn towards recovery and rebuilding. In such a time, companies like Home Depot and Lowe’s will be most suitably positioned to supply the much-needed tools and materials for these purposes. Seeing this potential, the stocks of both the companies have rallied upwards in the past week.

We have a $217 price estimate for Home Depot, which is marginally higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on Our Outlook For Home Depot In FY 2018 and to modify our driver assumptions to see what impact it will have on the company’s revenues, earnings, and price estimate.

See complete analysis for Home Depot’s stock

Large Number Of Stores In Affected Areas

Home Depot has a considerable number of stores – 114 – in the states most likely to be impacted by Hurricane Florence – North Carolina, South Carolina, and Virginia. This amounts to roughly 6% of its U.S. store count. For Lowe’s, the numbers are even higher. It operates a total of 232 stores in the three states, constituting over 13% of its stores in the U.S.  Though the two companies will be negatively impacted from the store closures in the affected areas, all the stores in the states may not be in the areas affected, and many of these outlets will receive a boost in sales as a result of the natural disasters.

Need For Home Repairs

As hurricanes are expected to devastate many houses, there will be a greater need to fix these post the storms. Such a scenario will boost the demand for products of home improvement companies such as Home Depot and Lowe’s, which cater to not only the do-it-yourself (DIY) segment, but also professionals in the home improvement/remodeling and construction space. Home owners face the likelihood of severely damaged properties, necessitating the demand for home improvement equipment and materials. Moreover, since some of the properties in the flood-affected areas may be without insurance, people will be forced to pay out of their pockets for the repair work. Hence, a significant 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 can be expected to have been selling large volumes of small-ticket items such as bottled water, tarps, and straps, as well as larger ticket times like fans, blowers, air conditioning units, and generators.

Hurricanes To Lift Sales But Pressure Margins

If last year is anything to go by, home improvement companies can expect a significant bump in their revenues post the hurricane. Home Depot estimated that the hurricane-related sales positively impacted total company sales growth by $652 million for the second half of FY 2017. Although the company hasn’t reported any sales-impact numbers since then, they had stated that a benefit, of a comparable sum, would continue in FY 2018 as well, with a majority of it occurring in the first half of the year. However, as a result of the additional supply chain costs and the customers stocking up on low-margin products, it may take a toll on the two companies’ bottom line.

We have a $118 price estimate for Lowe’s, which is higher than the current market price. The charts have been made using our new, interactive platform. You can click here for the interactive dashboard on Our Outlook for Lowe’s In FY 2018, to modify our driver assumptions to see what impact it will have on the company’s revenues, earnings, and price estimate.

See our complete analysis for Lowe’s.

 

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