Home-Improvement Stocks Are Sitting Pretty

By Jessica Menton 

Shares of home-improvement retailers weathered the storm in markets in August and are poised to keep climbing as the hurricane season ramps up.

The retail sector has been a bright spot in a volatile period for stocks, as recent economic data have shown consumer spending remained strong and Washington delayed some tariffs on Chinese goods until December.

Home-improvement stocks have done especially well, with shares of Home Depot Inc., Lowe's Cos. and Floor & Decor Holdings Inc. gaining 6.7%, 11% and 26%, respectively, in August. In comparison, the broader S&P 500 dropped 1.8% in the month.

Some investors feared that a weak housing market, slowing global growth and a drop in consumer confidence would hurt demand at the retailers. But Home Depot and Lowe's both posted higher sales for their latest quarters.

It is too early to tell what the effect on the retail sector will be as the East Coast braces for Hurricane Dorian this week. But analysts say the home-improvement companies could benefit as consumers make preparations for storms by buying generators and plywood, along with cleanup and repair activity including new roofing and flooring.

"Home-improvement retailers in particular tend to see a bump in their stock prices in anticipation of people rushing to board up their houses ahead of a storm," said Steve Frazier, president at Frazier Investment Management.

The retailers have historically seen a sales boost after a bout of mother nature. In the third quarter of 2017 when Hurricanes Irma, Nate and Harvey hit the U.S., Home Depot saw a rise of $282 million in initial sales after affected customers bought plywood, bricks, drywall and roofing material. Meanwhile, Lowe's hurricane-related sales in the same three-month period were roughly $200 million.

Both Home Depot and Lowe's have a big presence in Florida, with 153 and 126 stores in the state, respectively, as of the end of 2018. That represents 8% and 7% of their U.S. fleets, according to Jefferies. Floor & Decor had 18 stores, representing 18% of its total, the firm said.

To be sure, some risks remain. The potential for store closures, disruption at distribution centers and expenses from damages in affected regions threaten to put a lid on retailers' bottom lines in the near term, some analysts said.

"Higher hurricane sales may not drive increased [earnings before interest and taxes] dollars, as the incremental margins could be offset by the additional expenses," analysts at Wells Fargo Securities said in a research note last week.

Shares of Home Depot were down 1.8% and those of Lowe's were off 0.9% Tuesday as the broader market tumbled on disappointing manufacturing data.

Write to Jessica Menton at [e-mail]

(END) Dow Jones Newswires

September 03, 2019 16:00 ET (20:00 GMT)

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