Why Pool Corp., Home Depot, and Lowe’s Took a Dive Today

Shares of housing-related stocks Pool Corp. (POOL -7.52%), Home Depot (HD -4.08%), and Lowe’s (LOW -4.64%) were falling in Tuesday’s trading, down 6.9%, 4.1%, and 4.6%, respectively, as of 1:12 p.m. ET.

When housing-related names all fall in tandem, it’s likely a sign of something going awry with either one major name, or more generally with consumer confidence and/or inflation and interest rates. Tuesday, unfortunately, saw all types of these negative contributors.

Pool lowers guidance after-hours Monday, and consumer confidence/Fedspeak aren’t helping

Yesterday after hours, Pool Corp. issued a press release preannouncing weak second-quarter revenue and lowering its full-year earnings guidance. In the release, the company noted that second-quarter revenue was trending down about 6.5% relative to the prior year, and that it expects the full-year revenue to decline in a similar range. Management also lowered its earnings-per-share guidance from a range of $13.19 to $14.19 to a new range of $11.04 to $11.44.

While management noted the “non-discretionary” parts of the business remained solid, as one thinks they would, the “discretionary” parts of the business, predicated on general economic conditions, are much weaker than expected. In fact, CEO Peter D. Arvan elaborated the company now expects new pool construction activity to be down 15% to 20% this year, while remodel activity looks to be trending down 15%.

Pool Corporation’s updated guidance was a belly flop. Image source: Getty Images.

It’s not surprising Pool’s negative commentary is dragging down Home Depot and Lowe’s today as well. All three stocks play in the business of large-ticket home improvement purchases, so each is sensitive to interest rates for financing and the same types of macroeconomic drivers. Pool Corp. is a leading supplier of pool maintenance products, as well as other outdoor home products like grills and decking, while both Home Depot and Lowe’s operate as sort of a retail duopoly for home improvement and décor products.

As if Pool’s commentary wasn’t enough, Tuesday also saw other negative data points on the economic environment related to housing. At a conference in London earlier today, Federal Reserve Governor Michelle Bowman gave some hawkish commentary on the outlook for interest rates. “Inflation in the U.S. remains elevated, and I still see a number of upside inflation risks that affect my outlook,” Bowman said, while also reiterating she doesn’t anticipate any interest rate cuts this year.

Higher rates mean big-ticket projects get that much more expensive, which is likely to cause many consumers to delay such projects altogether.

As further evidence of that negative sentiment, June consumer confidence figures from The Conference Board Survey were released today, showing a slight downtick to 100.4, from May’s downwardly revised 101.3 reading.

That’s not a particularly terrible reading, at right around neutral. Still, the month-over-month downtick, as well as the downward revision of prior-month numbers, may be affecting the mood for economically sensitive stocks today, especially home retailers like these three.

A big reversal from the peak of the pandemic

During the height of the COVID-19 pandemic, when interest rates were super low and consumers couldn’t go out to spend on travel, the home improvement sector boomed. Unfortunately, the reversal of all those trends is biting back hard now, and it looks like the sector won’t normalize until inflation and interest rates retreat back to a more normal range.

While many had anticipated rates to begin ticking back lower through 2024, persistently sticky inflation in recent months has seemingly pushed out that timeline, and the wait is clearly weighing on companies like Pool and other housing retail stocks.