Home Depot

Home Depot’s CFO told analysts “home equity values over the last two years have increased by 40% or over $7 billion just in the last two years. So the homeowner has never had a balance sheet that looks like this. They’ve seen the price appreciation, and they have the means to spend.” “Richard McPhail — Executive Vice President and Chief Financial Officer: Sure. So just first to start with who our customer is, you need to keep in mind our customers are homeowners. Virtually all sales to our Pro customers are on behalf of a homeowner, and over 90% of our DIY customers are homeowners as well. So let’s talk about home improvement demand and what drives it. Over our history, we’ve seen that home price appreciation is the primary driver of home improvement demand. When your home appreciates in value, you view it as a smart investment and you spend more on it. So let’s look at what’s happened at home prices. We’ve seen an appreciation of over 30% over the last two years. In fact, home equity values over the last two years have increased by 40% or over $7 billion just in the last two years. So the homeowner has never had a balance sheet that looks like this. They’ve seen the price appreciation, and they have the means to spend. And in surveys, our customers tell us that their homes have never been more important, and their intent to do projects of all sizes has never been higher.” (Home Depot Q1 2022 Earnings Call Transcript, 5/17/2022)

Home Depot’s CFO predicted home price appreciation would continue “because where we have built a chronic shortage of housing units in the U.S. consistently and steadily for the last 10 years…we believe that supply and demand are going to be the main drivers of support for home price appreciation, and we know that that chronic undersupply is going to be a condition for quite some time. “Richard McPhail — Executive Vice President and Chief Financial Officer: Well, I think we’re in a unique position now in recent housing history where we have built a chronic shortage of housing units in the U.S. consistently and steadily for the last 10 years. Some economists assume that that shortage is a little less than 2 million. You hear numbers as high as 4 million. If you take other estimates of what will likely be built, we’re looking at least five years, if not seven or eight years, before we could actually get back to a point of equilibrium. So we believe that supply and demand are going to be the main drivers of support for home price appreciation, and we know that that chronic undersupply is going to be a condition for quite some time.” (Home Depot Q1 2022 Earnings Call Transcript, 5/17/2022)

Home Depot said rising interest rates could benefit their business further by keeping homeowners locked into current mortgages

Home Depot’s CFO said their business possibly benefitted from rising mortgage rates because their customers are “more and more tempted to stay in their low fixed rate mortgage and remodel their home instead.” “Richard McPhail — Executive Vice President and Chief Financial Officer: So let’s talk about interest rates. I think it’s important to remember that our addressable market is the 130 million housing units occupied in the U.S. plus probably, call it, 40 million to 50 million more in Canada and Mexico. Of those 130 million housing units, on any given year, only about 4% or 5% are sold. That means that over 95% of our customers are staying in place. They’re not shopping for a mortgage. Nearly 40% of those homes are owned outright. Of those who have mortgages, about 93% of those mortgages are fixed rates. So when you think about our addressable market, the vast majority aren’t really paying attention to mortgage rates. And what we’ve — what’s interesting about that is what we’ve heard, when they do look at moving, they’re actually more and more tempted to stay in their low fixed rate mortgage and remodel their home instead. So these low locked-in mortgages are probably a benefit to an improvement.”(Home Depot Q1 2022 Earnings Call Transcript, 5/17/2022)

Home Depot told analysts it was benefitting from commodity price inflation

Home Depot’s CFO said the company had an 11% increase in ticket sizes “the vast majority of that was inflation-driven.” “Ted Decker — Chief Operating Officer: Right. So I’ll start and then Jeff will give a little bit more detail. Yes, as I mentioned earlier, inflation is higher than we had expected to the extent about two times. The 11-odd percent ticket was the vast majority of that was inflation-driven. It is impacting transactions, but as we said, not to the extent that we would have thought. So that’s all good. We have taken costs this year, and there is more on the table. Transportation, we’ve just finished up our ocean contracts. That’s a global contract cycle that goes into effect in May. So those are in place for the next 12 months. Those are certainly higher on a contract basis from 2021. So we think inflation doesn’t go up necessarily from where we are but that it would hold steady at this, call it, double-digit, low 10-ish percent in our product categories through the balance of the year.” (Home Depot Q1 2022 Earnings Call Transcript, 5/17/2022)

Home Depot EVP: “Inflation from core commodity categories positively impacted our average ticket growth by approximately 240 basis points during the first quarter, driven by inflation in lumber, copper, and billing materials.” Jeff Kinnaird — Executive Vice President, Merchandising: Excluding seasonal categories, we are thrilled with the broad-based strength across the business and healthy project demand. During the first quarter, our comp average ticket increased 11.2% and comp transactions decreased 8.4%. The growth in our comp average ticket was driven primarily by inflation across several product categories as well as demand for new and innovative products. Comp transactions reflect the late start to spring and anniversary of stimulus. And on a two- and three-year basis, both comp average ticket and comp transactions were healthy and positive. Inflation from core commodity categories positively impacted our average ticket growth by approximately 240 basis points during the first quarter, driven by inflation in lumber, copper, and billing materials. Lumber prices remained volatile during the quarter. As an example, framing lumber peaked at approximately $1,300 per 1,000 board feet during the first quarter before falling over $400 to approximately $900. Big-ticket comp transactions or those over $1,000 were up 12.4% compared to the first quarter of last year. (Home Depot Q1 2022 Earnings Call Transcript, 5/17/2022)

Home Depot’s COO said that despite the growth in prices “we are not seeing the sensitivity to that level of inflation that we would have initially expected. “Ted Decker — Chief Operating Officer: We also think that the fundamentals — I mean these are all very short term in nature comments, but the fundamentals for home improvement remain incredibly supportive. So when you look at inflation and interest rates in any fatigue, if I take those in order, inflation is definitely higher than we thought. If you recall, last year, we thought we’d have about 5% growth in ticket. We’re seeing obviously much higher than that with 11% in ticket. A lot of that is inflation-driven. But our customers are resilient. We are not seeing the sensitivity to that level of inflation that we would have initially expected. (Home Depot Q1 2022 Earnings Call Transcript, 5/17/2022)