Fed Easing Cycle Could Benefit Home Improvement Chains – Oppenheimer

The Federal Reserve’s indication of a new policy easing cycle may provide a favorable outlook for home improvement retail chains in the longer term, according to analysts at Oppenheimer.

Recently, the US central bank implemented a significant 50-basis point interest rate cut and hinted at the possibility of further reductions by year-end.

In their report, analysts have upgraded their rating of DIY retailer Lowe’s to “Outperform” from “Perform.” They believe that the lower interest rate environment will likely encourage homeowners to undertake more substantial renovation projects. A period of high borrowing costs, characterized by rates at a two-decade peak for over a year, has adversely affected housing demand.

The analysts stated, “Prospects for demand trends within home improvement retail and at leading operators are expected to gradually firm up and return to a normalized expansion as lower lending rates stimulate improved housing activity, potentially supporting ongoing home price appreciation and motivating shoppers to make larger purchases.”

Despite this optimistic outlook, Lowe’s Chief Executive Marvin Ellison cautioned in August that the economic landscape for homeowners remains “challenging.” As a result, the company revised its financial forecast for 2024, anticipating weaker DIY sales.

Total sales for the full year are now projected to be between $82.7 billion and $83.2 billion, a reduction from Lowe’s previous estimate of $84 to $85 billion. Adjusted earnings per share (EPS) are expected to fall between $11.70 and $11.90, lower than the earlier guidance of $12.00 to $12.30.

This updated forecast is below analyst expectations, with the consensus estimate for annual EPS at $12.14 and revenue at $84.16 billion.

Nonetheless, the analysts from Oppenheimer believe that Lowe’s, along with rival Home Depot, is now “better-positioned.” They noted, “An underlying healthy, albeit more subdued housing backdrop in the US seems poised for a meaningful rebound as interest rates normalize, likely serving as a near-term catalyst for both Home Depot and Lowe’s.”