Large Supplier Checks Have Favorable Read Through For Home Depot, Lowe's

Wedbush’s Seth Basham mentioned that that read through from large suppliers regarding the fourth-quarter 2016 performance for Home Depot Inc HD and Lowe's Companies, Inc. LOW is favorable.

The analyst maintains a Neutral rating on both companies, with a price target of $145 for Home Depot and of $77 for Lowe’s Companies.

Sales Acceleration

“Sales growth trends accelerated at least 100 bps at all suppliers we tracked, with many specifically citing strength at the home centers,” Basham stated.

The analyst noted that demand had accelerated following the uncertainty associated with the presidential elections, and that consumers had continued to trade-up and respond to increased promotions.

Comps

For the fourth-quarter 2016, Basham believes that there could be upside to Home Depot’s comp guidance of 4.5 percent, while Lowe’s Companies’ comps were expected at 2.2 percent. This essentially means that both companies were likely to have seen a deceleration from the Q3 comp levels.

“We came away from meetings last month with HD management increasingly sanguine, and continue to prefer HD over LOW,” the analyst went on to say.

However, the promotional environment during the quarter was “intense,” with some suppliers noting that this led to negative impacts on margins.

Other Positives

With paint sales showing a “nice rebound” from the previous quarter, Basham believes that it could be an “incremental positive” for Lowe’s Companies.

However, labor constraints, “especially in 2Q16 and 3Q16, negatively impacted contractors’ ability to complete the increased level of demand for projects and amounted to softer sales growth in the summer,” the analyst pointed out.

On the other hand, favorable macro fundamentals now appear to be driving contractors to hire additional labor, which could lead to a robust start to 2017.

At Last Check

• Shares of Home Depot were up 0.97 percent at $140.01.
• Shares of Lowe's were up 0.45 percent at $73.84.