During a September 13 conference, Home Depot CEO Edward Decker gave the all-clear signal, claiming the Fed had inflation under control. Since then, mortgage rates have ripped higher and home improvement stocks have crashed as a result.
Since Decker declared victory over inflation, his company’s stock (HD) is down -10%. Lowe’s (LOW) and Floor & Decor Holdings (FND) are both down -15%.
"I almost threw up," Retail analyst Jeremy McClean said of Decker’s comments. "If there is a time to be short home improvement, I’d say it's right now.”
McLean and the Hedgeye Retail team never bought into Decker’s stance, keeping its short recommendations active and reiterating its bearish view in a “Black Book” webcast on October 20.
Among the conclusions in that presentation:
- “Existing home sales are in a depression, 30-year mortgage rates are now at generational (23-year) highs, active listings are at cycle lows, and nobody seems to be crossing their fingers expecting a ‘pivot’ like the common narrative was back in fall of 2022.”
- “Comp guides have fallen materially since the start of the year, yet we think it is far from enough, and the Street’s rapid inflection back to growth in early 2024 is too bullish … We’re short LOW, HD, FND, and TSCO in that order today.”
Yesterday, Floor & Decor Holdings {FND) gave a clear warning around demand risk over the coming six to 12 months. The company is cutting sales and earnings expectations and reducing store targets for 2024 given the accelerating demand risk.
“FND (a “Best Idea” Short) validated a lot of the risk we’ve been outlining over the past year for the home improvement space,” McLean says.
“The stock is getting crushed on this print, and Jeremy clearly laid out the risks just two weeks ago in a Black Book,” adds Retail analyst Brian McGough. “This is a battleground stock that EVERYONE wants to own and thinks can't go down, and it’s getting eviscerated.”
The crux of the Retail team’s home improvement call is that crashing home turnover will create persistent comp pressure for much longer than consensus expects. FND was macro unaware at the start of the year around the troublesome 2023 demand landscape, but now they are clearly waking up to the risks.
McGough and McLean also believe the demand elements discussed by FND are a risk to comps for Lowe’s and Home Depot as well over the next few quarters.
