2020 has been a hugely successful year for home improvement retail giants Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW). Both have seen revenue and net income grow by double digits as millions of homeowners have found themselves spending substantially more time in their homes during the coronavirus pandemic. But will the strong results continue? It’s less clear in the near term, especially with coronavirus vaccines now starting to be distributed. The same people who spent big on home improvement in 2020 might be more likely to spend their disposable income on travel and leisure in the future.
On the Nov. 6 edition of “The Wrap” on Motley Fool Live, host Jason Hall makes the case that strong home sales often indicate good business prospects for home improvement. See his discussion with Motley Fool and Millionacres contributor Tyler Crowe editor Millionacres editor Deidre Woollard below.
Jason Hall: They say that home sales is a leading indicator for home improvement stores. We’ve seen Home Depot and Lowe’s have just crushed it, their comps are double-digit now. Just insane the comps that they’ve delivered. My question is we have all this high demand, is pent-up demand for new homes that’s happening.
How good will this be — Deidre, I want to ask you to answer this one first — wow good is this going to be for Home Depot and Lowe’s over the next five years?
Deidre Woollard: Well, it’s hard to say over the next five years. It’s certainly been great right now. I mean, I’ve seen the lines outside of the stores. It’s also been great for Overstock, which sells a lot of furnishings. It’s been great for Wayfair. It’s been pretty good for Restoration Hardware. It’s lifted up a lot of different companies.
Anytime the home prices are up, people want to improve their homes. That always happens. But this year too, it’s also just that we’ve been stuck at home, and that’s partly what’s driving it. It’s not just the usual cycle that we see of prices are up, and so people want to get the most value out of their properties.
Jason Hall: There’s nothing normal about the 2020 economic activity that we’ve seen, right? Normally, all the things that have done well are the things that do terrible (in a recession). It’s definitely interesting that it’s seen. I think, for me, I’m really interested to see how this plays out too. Tyler Crowe, what do you think? Do we lose, Tyler? Looks like we might have lost Tyler.
Deidre Woollard: We lost Tyler. His Internet dropped for a second.
Jason Hall: Well, I’m going to pretend to be Tyler Crowe, and I’m going to give my thoughts on this.
Deidre Woollard: All right.
Jason Hall: I think Home Depot and Lowe’s — I won’t even say they’ve pulled it forward, I think they have soaked up a lot of consumer spending that might normally go on travel. People aren’t going to Disneyland on that big summer vacation, so they do something to their house, they remodel the kitchen, they put in a big swingset in the backyard for the kids to play on, they put in a pool. They’re making these big investments. They make a bigger deck. All of those kinds of home improvement things.
I think Home Depot and Lowe’s, I don’t think they’ve necessarily pulled forward a lot of business from the remodeling side, some, but I think a lot of it is just incremental things, projects that people might not have even planned to do because people are in their homes more.
Again, we’re going to see some cycles, because this is a consumer company that their business is based on the consumer economy, so it’s going to go through cycles, but I think that the housing boom is going to allow them to continue to deliver steady, solid growth. I don’t think we’re going to see what we saw this year. This is not repeatable.
I think it’s going to be tough for them to even deliver positive comps growth next year. I think they’re going to do good to be in the low single-digits, just because they did so much business in the second and third quarters. But I think over the next five or 10 years, I think it’s going to work out quite well for those businesses to still continue to deliver some nice modest growth. Hey, look, Tyler Crowe. Nice to see you buddy. Welcome back.
Tyler Crowe: Sorry about that about. Are we still on Home Depot and Lowe’s?
Jason Hall: Yeah. What do you think? Next five years.
Tyler Crowe: I think much more so for Home Depot over the next five years.
The reason being is if you look at the median age of the housing stock in the United States, it’s about 37 years. We’re running up to a point where it’s more than just paint, a couple of quick fixes here, a lot of places are going to be looking at significant repairs. We’re talking new roofs, new HVAC, a lot of that stuff.
Many of the things that are going to need to be done to that housing stock over the next five years is going to be more reliant on contractors than the DIY world. Things that you and I just can’t do on a weekend. As a result, I think you’re going to see a big boost from the contractor side of Home Depot over the next five years, just as that housing stock starts to turnover and people start looking at it and being like, “Man, this thing needs a new roof.”