Home Depot and Lowe's earnings face housing slowdown, tariffs test

Home Depot and Lowe's are set to report earnings amid significant headwinds including a stalled U.S. housing market, high interest rates, and tariffs, which have broadly impacted the building materials sector with sales drops of at least 4% from May to July. Despite this, analysts anticipate Home Depot to post a 5.1% Q2 revenue increase and Lowe's a 1.6% rise, citing their strong brand power and strategic focus on professional contractors as key differentiators enabling them to gain market share and navigate the challenging environment, though tariff implications and consumer spending remain critical factors.

Analysis

Home Depot (HD) and Lowe's (LOW) are approaching their earnings reports amidst significant sector-wide headwinds, including a stalled U.S. housing market and tariff pressures, which have contributed to sales declines of at least 4% from May to July for the broader building materials and garden supply retail category. Despite this challenging macro environment, both companies are expected to demonstrate resilience and market share gains against smaller competitors due to their strong brand equity and scale. A notable performance divergence is anticipated, with LSEG data forecasting a robust 5.1% Q2 revenue increase for Home Depot, a stark acceleration from last year's 0.6% growth, while Lowe's is projected to see a more modest 1.6% rise. This outperformance by Home Depot is corroborated by credit card data showing its sales were roughly flat year-over-year, compared to a mixed performance for Lowe's. Both retailers are strategically shifting focus towards their professional contractor businesses to offset softness in consumer spending. However, risk factors remain, particularly concerning tariffs; Lowe's has a higher exposure with approximately 20% of its goods sourced from China and has signaled price hikes in the second half, whereas Home Depot plans to absorb costs, which could impact margins but protect market share.

Key Decisions for Investors

• Investors should closely monitor upcoming earnings calls for management guidance on the housing market, as a potential Federal Reserve rate cut in September could serve as a major catalyst for the sector's recovery.
• Given Home Depot's significantly higher projected revenue growth and more diversified supply chain relative to Lowe's, consider overweighting Home Depot or exploring a long HD/short LOW pair trade.
• Pay specific attention to commentary on gross margins, as Home Depot's decision to absorb tariff costs could pressure profitability, while Lowe's planned price increases may risk sales volume in a price-sensitive environment.
• Scrutinize the growth and health of the professional contractor segment for both companies, as its performance is a critical buffer against the persistent weakness in the do-it-yourself consumer market.