Home Depot and Lowe's shares touch all-time highs. 3 reasons why the upward trend can continue

Published Tue, Mar 23 20213:37 PM EDT

Melissa Repko @in/melissa-repko @melissa_repko

Key Points

A hot real estate market and the changing ways that people use their homes could drive sales for Home Depot and Lowe's in the coming quarters.
Faced with a tight housing market, builders may need supplies for construction, homeowners may renovate or remodel and house-hunters may wind up with fixer-uppers.
The pandemic has ingrained homebody habits, too, such as working remotely part of the week, which can cause wear-and-tear.

Stuck-at-home Americans tackled long-delayed home repairs during the pandemic. They fought boredom with do-it-yourself projects. They made their houses cozier and more functional . That has paid off for Home Depot and Lowe's . Home Depot's shares have risen 80% and Lowe's shares have soared by about 170% over the past 12 months. Unlike some pandemic beneficiaries, their share prices have not fallen off in recent months. Both home improvement retailers hit fresh all-time highs on Tuesday. As investors make post-pandemic bets, there are some factors that are keeping these companies attractive to own, namely the hot real estate market and the changing ways that people use their homes. Home values are up. Mortgage interest rates are low. And more Americans are house-hunting, as they seek extra space for remote work, a home gym or a new pet. Those dynamics could fuel demand for floor tiles, lumber and kitchen appliances in the coming years — even as people can trade weekends of DIY projects for nights out on the town. So far, Home Depot and Lowe's have been conservative about their outlook. Home Depot declined to provide a forecast for the year, citing pandemic-related uncertainty. Its same-store sales increased 19.7% and its adjusted earnings per share rose 16.5% to $11.94 for the fiscal year versus a year prior. Lowe's predicted its annual sales will decline slightly , after multiple quarters of unusually high sales. Its same-store sales rose by 26% and its adjusted earnings per share grew 54% to $8.86 for the fiscal year, compared to the year prior. In an interview with CNBC, however, Lowe's CEO Marvin Ellison noted that "macro indicators" bode well for the retailer. He pointed to the shortage of homes on the market and the average age of the country's housing stock. "Even when this environment changes, we think the home improvement backdrop still will be very favorable," he said. Here's a closer look at three real estate dynamics that could help the home improvement industry: High demand, limited supply Before the pandemic struck, a new group of Americans were aging into home ownership. Millennials have surpassed baby boomers to become the country's largest generation , according to U.S. Census Bureau population estimates. The generation ranges in age from 25 to 40, according to the Pew Research Center's definition. "There's a large cohort of millennials who are moving up the ramp in housing demand," said Marty Young, senior mortgage analyst for Goldman Sachs. "25-year-olds don't buy a lot of houses. 35-year-olds do." Baby boomers, the second largest generation, have largely defied expectations and stayed put in their homes instead of downsizing and selling their homes to younger homeowners, Young said. That has contributed to a tight housing market. An average of 2.16 million homes were on the market in the U.S. from 1999-2020, according to the National Association of Realtors. That's fallen to about 1 million total housing units available for sale at the end of February. It has raised home values and spurred construction of new single-family homes. That could have downstream effects for Home Depot and Lowe's: More contractors and home professionals may need construction supplies because of the demand for houses. Homeowners may renovate or remodel, since they can't easily find an available or affordable place to move or see it as a good investment. And as house-hunters face a competitive market, they may wind up with a fixer-upper that needs extra attention — from replacing the roof to gutting the kitchen. Home Depot Chief Financial Officer Richard McPhail said the company has heard from contractors and other professionals that they have a backlog of projects. "It's an extremely healthy environment for the remodeler and any pro, no matter what your size," he said. And he said millennials have been a driving force in its sales, as they buy homes and develop a DIY habit. "The millennial generation has really pushed into home ownership headlong," he said. "We saw through this pandemic a real sparking of interest among those millennials. We think that interest in home improvement is in good position to continue among that generation." A shift to the suburbs A growing number of people have moved out of cities and into more spacious households in the suburbs or the outskirts of cities. Those decisions won't quickly reverse. The typical American homeowner in 2019 spent 13 years in their home , according to real estate brokerage Redfin. Young said inner ring suburbs, just outside of major metros, have seen the sharpest gains — particularly across the country's "Sun Belt" near cities like Phoenix, Tampa and Charlotte. In an interview on CNBC's "Squawk on the Street," Petco CEO Ron Coughlin partially credited the pandemic pet boom for inspiring young city dwellers to move to suburban and rural areas. He said they got new pets — and then wanted a yard or more room for them . As homeowners have more square footage, they typically have more walls to paint, repair projects to tackle and lawns to maintain. For Lowe's, there's a secondary benefit of that migration, Ellison said: Many of its stores are in suburban and rural areas, so they are closer to consumers who relocate. Homebody habits Americans have formed new habits and made purchases that may influence how much time they spend at home, even as they can go out and about without safety concerns again. Employees learned how to work remotely, inspiring companies to embrace new policies on flexible, hybrid work for years to come. Homeowners invested in pricey exercise equipment, new patios and kitchen tools. And families across the country added an estimated 3.3 million new pets to their household last year. "If you've got a new pet, guess what, you think at some point 'I need to replace the carpet,'" said Joe Derochowski, home industry advisor at The NPD Group. While many workers will return to the office, a larger percentage than before will spend at least part of the work week at home, according to research by the Federal Reserve Bank of Atlanta . Based on a survey of firms in May 2020, the share of work days spent at home is expected to triple compared to what it was before the pandemic, from 5.5% to 16.6% of all work days. In the survey, firms said they expect 10% of their full-time workforce to work from home five days a week. Some tech companies, such as Twitter , have gone further — saying employees can work remotely "forever," if they choose. More time at home — whether working or working out — means more wear-and-tear. Ellison often notes that about two-thirds of sales at Lowe's are nondiscretionary, such as fixing busted pipes or replacing a broken refrigerator. Derochowski said stay-at-home trends began before the global health crisis, but have become more entrenched. He said twenty- and thirty-somethings, in particular, have formed homebody habits like cooking and entertaining — a tendency he attributes to coming of age during the 2008 and 2009 recession. "What the pandemic did is add some additional gas," he said.