shares were down nearly 5% on Tuesday after the home improvement giant reported a mixed second quarter. The numbers hit Lowe’s stock even harder, a sign that investors are bracing for the retailer’s own results on Wednesday.
The drop in Home Depot (ticker: HD)—4.6%, to $319.78. in afternoon trading—put it on pace to notch its largest decline since November.
was off 5.4%, to $183.08.
On the surface, Home Depot’s earnings were better than expected—both its top and bottom lines came in above analyst estimates. But same-store sales grew a smaller-than-expected 4.5%. Traffic fell even as customers spent more, in part because of higher raw material costs, which has pushed up the price of products across several categories.
Same-store sales are a key metric in retail because they smooth out the impact of store openings and closures. In the past few quarters, they’ve become even more important for investors, who are looking for clues about how long pandemic winners—like home improvement companies—can keep their momentum going.
Home Depot and Lowe’s (LOW) have generally been standouts in the so-called stay-at-home trade, helped by a robust housing market: Consumers have kept putting money into their homes—from buying properties to taking on remodeling projects—even as vaccinations have allowed for a broader economic reopening.
Still, even bulls know the white-hot growth of 2020 isn’t sustainable: The consensus forecast for same-store sales to grow 5.4% was a marked slowdown from the prior four quarters, which each recorded double-digit sales jumps.
Yet, the comps slowing so quickly might have investors thinking hard about whether or how much longer Home Depot can sustain its pandemic bump, especially as stimulus checks wane and the housing market settles down. Plus, Home Depot didn’t provide any guidance to counteract the gloominess.
And that’s probably what’s weighing on Lowe’s.
While Lowe’s has made major strides in its turnaround efforts in the past few years—the stock outperformed Home Depot’s over the past 12 months and Barron’s named Chief Executive Officer Marvin Ellison to its Best CEOs list this summer—most analysts agree it still has some catching up to do.
Home Depot is still seen as the industry’s gold standard, and was tipped to hold on to its pandemic momentum longer, given that it caters more heavily to professionals who are still working through big backlogs of projects.
So Home Depot’s comps falling off more quickly than expected could be spooking investors about Lowe’s prospects. Consensus was already calling for Lowe’s same-stores sales to fall 1.7% in the second quarter, and some may worry the decline will be steeper, or that a drop in demand could cause the company to miss other estimates.
Whatever the case, investors don’t have to wait long to find out. Lowe’s is slated to report before the start of regular trading Wednesday.
Write to Teresa Rivas at firstname.lastname@example.org