Home improvement stock trend brings back bad memories, says Gordon Chuck Grom, analyst at Haskett.
In a note to clients on Friday broadly degrading the sector, he explained that while there are reasons to remain constructive on many names, the rapidly increasing uncertainty that permeates the market has completely upended his predictions.
“Over the past two months, the rules of engagement have clearly changed,” Grom wrote. “We had deja vu in 2006/2007 before the GFC.”
He explained that a confluence of rising rates, a return to pre-pandemic home improvement trends, a consumer who may be unwilling to accept persistent price increases and likely margin erosion bode ill. for space.
“While most retailers have yet to experience inelasticity issues when passing through price increases… it’s likely that at some point over the next few months the consumer will balk,” wrote Grom, adding that trends in the restaurant space have telegraphed this turning point.
As such, even at low valuations relative to historical trends, Grom does not see much appeal in the sector. Additionally, he expects more incremental sellers versus incremental buyers in the coming months and rallies are dampened.
In the in-depth industry review, Grom downgraded shares of Home Depot (NYSE: HD), Lowe’s (NYSE: LOW), Tractor Supply (TSCO), Floor & Decor Holdings (FND), Restoration Hardware (RH), Wayfair (W) and Williams-Sonoma (WSM).
Downgrade to “Accumulate”
Home Depot (HD), price target reduced from $355 to $330
Lowe’s (LOW), price target reduced from $255 to $225
Tractor Supply (TSCO) price target reduced from $260 to $230
Floor & Decor Holdings (FND), price target reduced from $100 to $90
Downgrade to “Hold”
Restoration Hardware (RH), price target reduced from $465 to $330
Switch to “Reduce”
Williams-Sonoma (WSM), price target reduced from $200 to $130
Wayfair (W), price target reduced from $80 to $60
Speaking on the accolades, Grom said the “Accumulate” group represents structurally sound companies and the long-term outlook remains positive. Stocks are simply victims of the aforementioned macroeconomic and earnings issues and are therefore constrained.
For Restoration Hardware (RH), which on its own is a “Hold,” demand trends were cited as likely to disappoint as production issues also persist. The company also stands out for its early appeal on the impacts of inflation on its business.
Finally, Williams-Sonoma (WSM) and Wayfair (W) were downgraded to a sell equivalent based on “demand destruction from higher prices” and anticipation of promotional activity as supply chain dynamics are changing.
“Home furnishings suppliers and retailers are now in an oversupplied position with too much inventory now in the channel,” Grom explained. “That will 100% lead to a much higher promotional cadence over the remainder of 2022.”
He expects this activity to hit margins as oversupply is likely to be felt.
Shares of nearly all of the downgraded names are approaching their 52-week nadir, with the notable hold of Tractor Supply Company (TSCO).
Learn more about the recent downtrend in the retail sector.