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06/01/2022

Inflation? Rising mortgage rates? So what?

Home Depot makes the case for sustained growth in the face of headwinds.
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Home Depot store front angled
The company raised its guidance for the year.

The latest Home Depot earnings report, covering the three months ended May 1, played out against a backdrop of headlines warning of rising inflation (up 8.3 percent in April, according to the Bureau of Labor Statistics) and home mortgage rates.

Meanwhile, people might be warming to the idea of spending on vacations, movies, clothes, cars— anything other than the home after a pandemic-induced national spree of indoor and outdoor projects.

Should the orange-vested executives be worried?

That was the question, though not exactly in those words, directed to the Home Depot executive team during its first quarter earnings call. More specifically: are inflationary pressures, rising interest rates, home improvement fatigue or any combination of these factors having a negative impact on the business?

Richard McPhail, CFO and executive vice president, gave perhaps the most detailed response, describing the health of the company’s customer as “strong.”

Adding to the optimism, McPhail explained that the company’s customers are essentially homeowners. Sales to pro customers are almost always on behalf of a homeowner, and 90 percent of DIY customers are homeowners, too.

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McPhail
Richard McPhail, CFO

“Over our history, we’ve seen that home price appreciation is the primary driver of home improvement demand,” he said. “When your home appreciates in value, you view it as a smart investment and you spend more on it.”

Home appreciation has risen more than 30 percent over the last two years, he said, and home equity values have increased by 40 percent over that same period.

“In surveys, our customers tell us that their homes have never been more important, and their intent to do projects of all sizes has never been higher,” McPhail said. “And our pros say the same thing about their backlogs.”

What about interest rates?

McPhail again did the math: Of 130 million housing units in the United States, only about 4 to 5 percent are sold in a typical year.

“That means that over 95% of our customers are staying in place,” he said. “They’re not shopping for a mortgage. Nearly 40% of those homes are owned outright. Of those who have mortgages, about 93% of those mortgages are fixed rate. So when you think about our addressable market, the vast majority aren’t really paying attention to mortgage rates.”

Moreover, he said, for those home homeowners who may be considering a move, high interest rates might encourage them to remain in a low-interest loan and remodel their existing home.

The company backed up its optimism by raising its guidance for sales growth (to 3.0 percent) and operating margin (to 15.4. percent), among other factors.

“While a number of uncertainties remain, we feel confident that we will be able to continue to manage through a dynamic environment while growing faster than our market and delivering exceptional shareholder value,” McPhail said.

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