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The Ratings Game: Declines in do-it-yourself home projects could put a monkey wrench in Lowe’s near-term results

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Lowe’s Cos. Inc. posted fiscal second-quarter earnings that beat expectations, but analysts are warning that fewer do-it-yourself projects could put a squeeze on the home retailer for the near-to-mid-term.

“As anticipated, during the quarter we saw a decline in DIY demand versus last year as many families transitioned back to pre-COVID purchase patterns and weekend mobility after Memorial Day,” said Lowe’s
LOW,
+0.61%

Chief Executive Marvin Ellison on the earnings call, according to a FactSet transcript.

“But because of the agility of our Total Home strategy, we were able to capitalize on Pro demand, driving growth of 21% this quarter and 49% on a two-year basis. This level of Pro growth would not have been possible without our intense focus on the Pro customer over the past 24 months.”

See: Lowe’s stock gains after surprise growth in sales, profit and same-store sales beat expectations

In April, Lowe’s announced new professional amenities, including a new Pro Zone.

Raymond James maintained its market perform rating on Lowe’s stock despite results that analysts called “impressive.”

“That said, we remain on the sidelines for now, as we are concerned about more muted near-term performance in 2H21 relative to peers, given Lowe’s smaller Pro exposure of ~20%…combined with the need to spend a notable amount of capital on long-term supply chain projects,” wrote analysts led by Bobby Griffin.

“This was evident in F2Q, with Home Depot’s comps outpacing Lowe’s by
610 basis points.”

Chief rival Home Depot Inc.
HD,
-0.07%

reported quarterly sales that exceeded $40 billion for the first time on Tuesday, but same-store sales fell short.

“While Lowe’s has made many improvements to its Lowe’s For Pro’s program, which is reflected in the 21% sales growth it posted for this segment, it is coming from behind as Home Depot is still the preferred choice of a majority of professionals,” wrote Neil Saunders, managing director of GlobalData.

“Some of this is habitual, but a lot is also down to a perception that Home Depot has a superior range, is better at having items in stock, and offers a wider selection of services. Over the quarters ahead, it will be vital for Lowe’s to correct some of these perceptions and double down on attracting professionals if it wants to boost growth.”

Also: Walmart and Home Depot beat earnings expectations but a number of factors are putting a squeeze on the consumer shopping spree

Wedbush analysts also factor in the impact of lumber prices on DIY projects.

“The company’s updated outlook assumes the home improvement market will moderate given lower levels of commodity inflation and a continued increase in consumer mobility driven by a return to work and school; however, the environment remains fluid with the delta variant trends creating new uncertainty,” analysts said.

Wedbush rates Lowe’s stock neutral with a $210 price target.

And: Why now might be the best time to buy lumber

Lowe’s stock has gained 5.6% for the week so far, compared with a 2.6% decline for Home Depot.

Lowe’s shares have added 25.3% for the year to date, outpacing the S&P 500 index
SPX,
-0.08%
,
which is up 17.4%.

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