Lowe's(NYSE: LOW) appeals to the do-it-yourself spirit of some American homeowners. However, when the housing market is under pressure, renovation projects may be shelved -- and that's problematic for Lowe's.
This explains why Lowe's, although not directly considered a real estate company, is highly sensitive to interest rate policy. So, when the future path of mortgage rates is unclear and homeowners are reluctant to sell their homes, Lowe's takes on the traits of a fixer-upper that might be off-putting to investors.
Looking for an elusive breakout
For the past two years, Lowe's stock has had opportunities to break through the stubborn $250 level, but it failed. The company's recently announced quarterly results evidently weren't enough to put the Lowe's share price over the top.
It's not difficult to figure out what's been holding the stock back. Lowe's CEO Marvin Ellison spelled it out, explaining in a conference call: "Macroeconomic factors like persistent inflation and a stagnant housing market continue to make DIY customers and consumers hesitant to spend on big ticket purchases for their homes."
While the 30-year fixed U.S. mortgage interest rate isn't at 8% anymore, it's still relatively high, and that's certainly not making things easier for Lowe's. Amid this challenging backdrop, it's bad news for Lowe's if -- as some oddsmakers seem to expect lately -- the Federal Reserve is in no hurry to cut interest rates this year.
Ellison also referred to some home-improvement customers' "heightened focus on value." This may be a polite way of saying that, in response to inflation, Lowe's customers don't want to spend money on big-ticket items. This helps explain why the company's sales dropped to $18.6 billion in 2023's fourth quarter, versus $22.4 billion in the year-earlier quarter.
For what it's worth, Ellison fully acknowledged his company's sensitivity to interest rate policy changes. Not only is there "still a lot of speculation on the timing of anticipated interest rate cuts and the pace of slowing inflation," but the CEO can't predict "how quickly the consumer will react to these changes and how quickly their spending habits will change." Along with all of that, Ellison observed that many homeowners have already locked in sub-4% mortgage rates. So home selling and buying activity and, hence, the demand for do-it-yourself projects, are likely to "remain under pressure."
A slowing slowdown
The point is that even Lowe's chief executive, whose job is to be the company's best promoter, has to acknowledge that 2024's path forward is unclear at best. At the same time, Ellison cited trends that should boost business for Lowe's, including a "chronic undersupply of homes, millennial household formation, baby boomers aging in place, and a sustained number of people working from home." But then, these seem to be secular/generation trends, whereas interest rate policy will affect Lowe's in the immediate term.
Moreover, Lowe's same-store sales are in a state of decline, though that slowdown might ease soon. Specifically, the company's comparable-store sales fell 6.2% year over year in 2023's fourth quarter. Lowe's sees a continued fall-off in same-store sales in 2024, though the full-year decline is expected to only be 2% to 3%.
Maybe U.S. housing-market conditions have been so bad that they can only get better from here. According to Citigroup analyst Steven Zaccone, "On an annual basis, 2023 was the worst year for home improvement spending since the bursting of the housing bubble."
Again, however, it's nearly impossible to envision the home improvement market turning a corner in 2024 without some help from the Federal Reserve. As long as the central bank remains coy about the path of interest rate policy, Lowe's stock may push above $250, but a sustained rally seems improbable. So, though Lowe's investors can certainly hold their shares if they expect a Fed pivot in the near future, they should heed Ellison's cautionary remarks and refrain from adding to their positions for now.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. David Moadel has no position in any of the stocks mentioned. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.
