Home Depot (HD) reported a decline in sales in its fourth quarter results. Chief Executive Officer Edward Decker said rising interest rates were a headwind challenging demand for home improvement retailers.
TD Cowen Retail & Luxury Director Max Lakulenko appears on Yahoo Finance Live to comment on how retailer revenue numbers reflect the current U.S. housing market.
“We expect the home improvement sector to decline by low single digits in 2024. After that, we think Home Depot will gain some market share, but overall…mortgage rates will be around Even though we're down 100 basis points, if you look at some markets, real-time data shows we're not seeing any increase in existing home sales given inventory is so tight. I can’t…” says Rakulenko.
For more expert insights and the latest market trends, click here to watch the full episode of Yahoo Finance Live.
Editor's note: This article was written by luke carberry morgan.
video transcript
Josh Lipton: Chief Executive Officer Ted Decker told analysts on an earnings call that he expects higher long-term interest rates to weigh on consumer demand. However, despite the near-term pressures on the industry, TD Cowen maintains an Outperform rating on Home Depot stock. We have a new addition: Max Lakulenko. TD Cowen Retail Luxury Director.
Max, I'm glad you're on the show. First of all, Max, listen, now that you've had time to look over the report, please let me know your reaction, your reaction to the results.
Max Lakulenko: wonderful. Thank you very much for joining us this afternoon. So our fourth quarter results were pretty much in line with expectations. Same-store sales were slightly above what Street was looking for, as was EBIT margin. The outlook for 2024 was slightly softer. The company expects same-store sales to decline by about 1%. We were looking for something a little better.
We believe this guide is pretty much what investors were looking for. We are relatively conservative and believe that if this year turns out to be even slightly better than expected, we could see a significant increase.
Julie Hyman: But overall, if you look at what's going on in the housing market, the data continues to be not very encouraging, right? Overall, is it the home improvement sector that we're looking at? You know, it sounds a little bit optimistic on the upside. But now we see it being under some pressure.
Max Lakulenko: Yes, certainly. Therefore, the home improvement sector expects him to decline by low single digits in 2024. After that, Home He believes Depot will gain some market share. But overall, you're completely right. Even though mortgage rates are down about 100 basis points, some of the real-time data shows we're not seeing any increase in existing home sales given that inventory is so tight. .
Expect inventory to increase as the year progresses. And if there is some kind of rate cut in the second half of this year, 2025 should be in a more favorable position. But in general, the debate over when existing home sales will recover or whether it's delayed is such. And eventually, home renovations should accelerate little by little.
Josh Lipton: And Max, I'm also interested in looking at this stock. Stock prices have been strong lately, Max. It has risen about 25% since the beginning of November. What does the rating here look like to you?
Max Lakulenko: So the valuation right now is a little bit limited, both compared to the lows, its relative multiples, and compared to the S&P. We think the forecast for the next few years is positive. So, as the top line and margins continue to recover, we believe valuations will reach a slightly more normalized level. But where we sit today, it's certainly towards the higher end of the range.
Julie Hyman: So if overall home improvement growth is in the single digits and you have Home Depot and Lowe's, which one should investors look to add in that environment?
Max Lakulenko: of course. Therefore, I prefer Home Depot over Lowe's. One of the main reasons we like it is that it gives Home Depot much more exposure to the professional channel, especially in the short term. So Home Depot pro accounts for about 50% of sales. At Lowe's, it's only about 25% of sales. Therefore, as we model 2024, we expect home improvement trends to improve. Because the professional market is actually more resilient than what we've seen in the DIY market.
The real problem with DIY is buying discretionary and expensive tickets. People are really backing away from it. You've previously talked about rising interest rates and other consumer headwinds. Therefore, we expect pro-business to continue to outperform. Therefore, we expect Home Depot to trend better than Lowe's in 2024.
Josh Lipton: Max, thank you very much for joining us today. Thank you very much.
Max Lakulenko: wonderful. Thank you for having me on board.
