Are Crashing Lumber Prices Good or Bad News for Home Depot and Lowe's?
The price of lumber surged during the pandemic. Suppliers miscalculated the effect of the pandemic on demand for their products. Rather than falling off, demand surged as people stuck at home took to home improvement projects.
The boost in demand coupled with reductions in supply sent prices of lumber up to $1, per 1, board feet in May of this year from a low of $ at the end of March Since hitting that high in May, prices have come crashing back down and sit at $ per 1, board feet as of this writing.
Lumber is vital for many of the projects that people go to Home Depot(NYSE:HD) and Lowe's(NYSE:LOW) for. Therefore, drastic price changes could cause consumers to change their buying decisions.
Lumber prices are crashing. Image source: Home Depot.
Lumber inflation is fueling revenue increases
Interestingly, as the price of lumber was rising, Home Depot and Lowe's were raising prices they charge customers, and so far, those higher prices have not decreased demand. Perhaps it's because people feel wealthier after several rounds of stimulus checks have hit their bank accounts since the pandemic. Or it could be that people are spending a lot more time at home lately and see a higher return on investment on their home improvement projects.
Regardless, both Home Depot and Lowe's have said that rising commodity prices have helped juice their sales as they have passed along the price increases to their customers. Home Depot said, "Inflation from core commodity categories positively impacted our average ticket growth by approximately basis points during the first quarter."
Similarly, Lowe's said, "Strong sales growth was driven by several factors, including a continued consumer focus on the home, a favorable weather backdrop across the country, commodity inflation, especially within the lumber category, consumer support from the March government stimulus package "
Given that both companies are experiencing rapid sales growth since the pandemic onset, it's hard to say their sales could have been better if lumber prices remained lower. You may already be aware that lower prices tend to increase unit sales. However, when you are already selling nearly every unit you have on the shelf, lower prices cannot increase unit sales.
That may not be the case for home improvement retailers any longer.
Crashing lumber prices may cause some people to take on new projects. Image source: Getty Images.
The U.S. vaccination campaign got off to a fast start and, even though it has slowed down recently, over million doses have been administered. As a result, states have eased business restrictions, and people have more options for what they can do with their time and money. Further, it's been several months since the last stimulus check was sent, so consumers will have less money at their disposal.
The decrease in lumber prices comes at an opportune time when the consumer is likely to become more price-conscious. And with more options for where they can spend their money, inventories are not likely to be as constrained as they were during the pandemic. The result could be that lower prices cause people to take on projects they previously put on hold because they were too expensive to complete.
It can help the home improvement retailers to have a soft slowdown from the turbocharged growth rates during the pandemic. And in the longer run, sustained low levels of lumber prices could increase home building and subsequently homeownership, which would be great news for Home Depot and Lowe's.
Lumber Prices are Crashing: What That Means for Home Depot
Lumber prices have taken a wild ride since the onset of the pandemic. Folks who were largely cooped at home took to starting home improvement projects, many of which required wood.
Imbalances in supply and demand pushed prices for lumber from $ per 1, board feet in March up to more than $1, for the same amount in September And though they fell back below $ just a month later, prices then began to stagger upward again, until March , when they skyrocketed from around $ for 1, board feet to a peak above $1, in May.
However, since mid-May, lumber prices per 1, board feet have crashed back down and now sit at $
Image source: Getty Images.
Home Depot(NYSE:HD) benefited from those higher prices, as it was able to pass them along to customers. Now, the reversal of that trend could prove to be a drag on the home improvement retailing giant's financial results in an already challenging period.
A tough comparison
Sales surged for Home Depot in its fiscal second quarter of (the three months ending Aug. 2). As an essential retailer, it kept operating during a period when many other businesses had to temporarily close. And with folks under lockdown focused on making their homes more comfortable, the retailer's sales that quarter increased by % year over year. Interestingly, that sales surge came before the surge in lumber prices.
When Home Depot reports its fiscal Q2 results next month, it will be surprising if it's able to match the elevated revenue of last year. And with prices for lumber down by roughly 66% in the past few months, that part of its business will likely not help boost the top line.
However, folks still have cash saved from the several rounds of stimulus checks and other stimulative government fiscal policies to help combat the pandemic. That could continue to fuel sales at Home Depot even if it doesn't result in enough revenue to eclipse the previous year's levels.
No signs of slowing yet
According to management, the surge in commodity prices, where lumber is the main component, helped increase Home Depot's sales by basis points in the first quarter of fiscal , which ended Feb. 2. Overall, sales increased by % from the same quarter last year. Here's what CEO said about the quarter:
Similar to what we reported in our previous three quarters, the growth in our comp average ticket was driven by elevated project demand, customers' trading up to new and innovative products, and continued inflation in many product categories, including lumber.
Focus on the long run
Investors should expect volatility in Home Depot's sales in the next few quarters. The company is entering into unprecedented territory, and no one knows how consumers' spending habits will evolve in the aftermath of the acute phase of the pandemic.
One thing is for certain, however: The home is going to stay a more important part of people's lives than it was before the pandemic struck. Remote work appears likely to remain far more common too.
Over the last decade, Home Depot's revenue grew at a compound annual rate of %, and that's roughly what investors should expect from it over the long term. Keep in mind, though -- disruptions related to the pandemic may cause fluctuations far above or below that rate in the near term. As always, investors should focus on owning stocks for the long term. In that regard, buying and holding Home Depot stock for a decade or two is likely to make you wealthier than when you started.
Police stop exorcism in Home Depot lumber aisle
Pennsylvania police claim they were called to a Home Depot on a report of “disorderly people having an exorcism” in the lumber aisle.
The exorcism was for the dead trees and the would-be wood exorcists were escorted out of the building, according to a now-viral post from the Dickson City Police Department.
The incident was described in only 27 words, part of a long list of the small-town department’s daily log of calls – but the post has drawn attention due its bizarre quality and had been shared more than times as of Thursday.
The so-called exorcism, which was said to have taken place at p.m. Monday, had commenters on the PD’s page confused.
One suggested maybe it should have said “having an exercise.”
“Dang autocrrect,” the commenter said.
“THE POWER DRILL OF CHRIST COMPELS YOU,” wrote another.
“How does a wood exorcism happen in and not a single person in Home Depot videoed this for our entertainment. I need answers,” one commenter said.
There were two people who took part in the exorcism, or whatever it was and neither was charged, WTSP reported.
Home Depot, Lowe’s share lumber crisis update
Americas biggest home-improvement chains say the lumber market is returning to normal after a period of extreme and record volatility.
A near doubling of lumber prices zapped consumer demand at do-it-yourself retailers Home Depot Inc. and Lowes Companies Inc. and pressured margins at the companies.
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"We have been selling many of our lumber products at compressed margins because we had previously purchased these products at higher cost," said Lowes CFO David Denton on the companys second-quarter conference call on Wednesday. "However, we expect that by the end of August, we will have substantially sold through these higher-cost inventory layers."
HOUSING STARTS UNEXPECTEDLY FALL IN JULY
Lockdowns aimed at slowing the spread of COVID caused supply chain disruptions that resulted in the price of lumber soaring this year through May 7 by as much as 93% to $1, per thousand board feet. Prices have since fallen by 73% to $, a level last seen in July
Lowes do-it-yourself customers slowed their lumber purchases due to the big run-up in prices.
Lowes said inventory was $ billion at the end of the second quarter, down $ billion from the first quarter and in line with seasonal trends. The total includes a $ million year-over-year increase related to inflation, the majority of which is due to lumber.
The company said higher lumber prices were responsible for 25 basis points of pressure on margins. Still, higher lumber prices helped lift the comparable average ticket by %.
Rival Home Depot saw a similar impact.
The Atlanta-based home improvement retailer on Tuesday said lumber accounted for about 60 basis points of margin pressure during its second quarter.
However, lumber was one of the companys fastest-growing categories and helped boost big-ticket purchases, or those of $1, or more, by 24% compared with the same period a year prior.
Home Depot says demand has returned as lumber prices have retreated.
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"At those high levels, we saw an impact to units, our units had turned negative," said Home Depot COO Ted Decker.
"And as prices have come down, units are still negative, but on a sequential basis, improving in responding to that lower price," he added. "Supply and demand dynamics worked as expected."
Depot lumber home
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