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HOME IMPROVEMENT RETAIL STORE ON THE RISE!

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By Linda Stewart

Home-improvement retailers are higher on Monday, thanks to positive analyst commentary.

While the threat of e-commerce pummeled other retailers, home-improvement stores have long been one area of relatively safety in the sector.

Analysts don’t expect that to change, as fundamentals suggest more strength ahead for the stocks.

Retailers have easily outperformed the market in 2018. Some of that success stems from areas of the industry, like department stores, that had previously been left for dead in the wake of Amazon.com’s(AMZN) relentless rise. Yet other areas of the market, like home improvement, have been rising all along, and Telsey Advisory Group doesn’t think that will change any time soon.

Analyst Joseph Feldman reiterated an Outperform rating on Home Depot(HD), Lowe’s(LOW), and Floor & Decor Holdings(FND) Monday, and raised his price target on the former, to $226 and $123, respectively, from $217 and $118. He writes that the home-improvement industry continues to have the best fundamentals in his coverage, even as home prices and mortgage rates rise.

Feldman is upbeat about the home-improvement retailers, writing that Home Depot is a “best-in-class operator,” while Lowe’s new leadership team and improved execution and productivity should boost the stock. As for Floor & Decor, he calls it a “disrupter” given its wide product assortment and low prices.

Certainly, housing affordability has become more of a worry, and rising interest rates have pushed up mortgage costs. However, he argues that those factors are offset by other positives, like consumer confidence and employment. “Within retail, the home-improvement stocks are more influenced by macroeconomic factors than by consumer preferences for particular products or brands.”

Home furnishings look like another bright spot, argues Keybanc Capital Markets. Analyst Bradley Thomas upgraded Restoration Hardware parent RH(RH) to Overweight from Sector Weight today, and established a $166 price target.

He writes that the stock’s recent pullback has led to a “compelling buying opportunity,” given RH’s long-term transformation, along with initiatives to improve margins and merchandising. The shares trade at a discount to peers and the S&P 500, Thomas notes, while sporting an 8% free cash flow yield, and he believe s that it can grow earnings per share by two to three times over the next decade.

Home improvement has long been relatively immune to retail’s woes, given that appliances and paint aren’t as easy Amazon-able as other staples like paper towels. Home Depot was one of 2017’s biggest winners in a year that held little joy for other retailers, in large part because of its ability to sidestep the e-commerce threat. Lowe’s has long trailed Home Depot but new leadership, activist involvement and stronger earnings has given Lowe’s the edge this year.

Home Depot is up 2.2% to $210.86 this morning, while Lowe’s is climbing 2% to $111.78. RH is 3.3% higher to $130.32, and Floor & Decor is rising 1.8% to $35.62. The SPDR S&P 500 Retail ETF is up 0.8% to $51.69.

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