A strong housing market is good for home improvement retailers like Home Depot.
And so by raising its full-year earnings outlook on Tuesday, the company signalled that it expected the housing market to continue to boom.
During the earnings call, here’s how CEO Craig Menear responded to an analyst’s question on why the company is bullish on housing even though there’s peril in other retail segments (emphasis added):
“So clearly, when we look at housing, things that we focus on are home value appreciation which continues to grow, we look at housing turnover, which is kind of running at norms, a little north of 4% of the housing stock is projected to turn in fiscal 2016. And then we look at new household formations and all of those are drivers in our business and all of those continued to recover.”
Let’s break down those three things real quick:
Because of a dearth in housing supply, prices have been skyrocketing. Unsold inventory is at a 4.6-month supply at the current pace of sales, below the average historical supply of six months. And so, companies involved in home construction and improvement stand to benefit in terms of higher revenues.
Home Depot is also betting on greater turnover in existing home sales. In June, sales of existing condos, townhomes, and co-ops increased to a nine-year high, even though inventory is shrinking. And many of the people repainting and remodelling these homes are buying from Home Depot.
Third, while more millennials are choosing to rent instead of buy homes, that switch is lifting household formation.
Menear added that the performance of Home Depot’s big-ticket and Pro sales make him confident about the company’s future performance.
But the three macro themes, which are happening right now outside of Home Depot, are the bigger drivers of housing to focus on right now.