The trend in home improvement stocks is bringing back some bad memories, according to Gordon Haskett analyst Chuck Grom.
In a note to clients on Friday broadly downgrading the sector, he explained that while there is reason to remain constructive on many names, the rapid increase in uncertainty pervading the market has completely upended his prognostications.
“Over the past couple of months, the rules of engagement have clearly changed,” Grom wrote. “We are having some déjà vu back to 2006/2007 before the GFC.”
He explained that a confluence of rising rates, a reversion to pre-pandemic home improvement trends, a consumer that may not be keen to take persistent price increases, and likely margin erosion portends poorly for the space.
“While most retailers have yet to experience any inelasticity issues on passing along price increases…it’s probable that at some point in the coming months the consumer is going to balk,” Grom wrote, adding that trends from the restaurant space have telegraphed this turn.
As such, even at low valuations relative to historical trends, Grom does not see much attractiveness in the sector. Further, he expects more incremental sellers versus incremental buyers in coming months and rallies are reined in.
In the sweeping 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 cut from $355 to $330
Lowe’s (LOW), price target cut from $255 to $225
Tractor Supply (TSCO), price target cut from $260 to $230
Floor & Decor Holdings (FND), price target cut from $100 to $90
Downgrade to “Hold”
Restoration Hardware (RH), price target cut from $465 to $330
Downgrade to “Reduce”
Williams-Sonoma (WSM), price target cut from $200 to $130
Wayfair (W), price target cut from $80 to $60
Speaking to the distinctions, Grom advised that the “Accumulate” grouping represents businesses that are structurally sound and long-term prospects remain positive. The stocks are merely victims of the aforementioned macroeconomic and earnings issues and therefore rangebound.
For Restoration Hardware (RH), which stands alone as a “Hold,” demand trends were cited as likely to disappoint while production issues persist as well. The company is also notable for its early call on inflation impacts to its business.
Finally, Williams-Sonoma (WSM) and Wayfair (W) were downgraded to a sell-equivalent based upon “demand destruction from higher prices” and the anticipation of promotional activity as supply chain dynamics shift.
“Home furnishing suppliers and retailers are now in an over-supplied position with too much inventory now in the channel,” Grom explained. “This will 100% lead to a much greater promotional cadence over the balance of 2022.”
He expects that this activity will hit margins as oversupply likely comes to bear.
Shares of nearly every name downgraded are nearing its 52-week nadir, with the notable expectation of Tractor Supply Company (TSCO).
Read more on the recent down-trend across the retail sector.