Both Home Depot and Lowe’s are scheduled to report their FY4Q (period end January) next week. We put together the following earnings preview using Amenity's text analytics platform. Our efforts focused on analyzing sentiment as well as key themes from recent Home Depot and Lowe's earnings calls, and also identified broader Retail sector trends to determine what investors should look for next week.

Recent data points suggest it was likely an eventful quarter with several crosscurrents. The Fed may have triggered macro headwinds in the first half of the quarter, while signals from the Retail ecosystem have recently been mixed. On the company-specific level, we a look for potential competitive impact as new management at Lowe’s implements its restructuring efforts.

The Starting Point: A Bullish Tone for Home Depot and Lowe's in FY3Q

Lowe's (11/20/18):

• "Although interest rates have ticked up and housing turnover has been pressured, the home improvement backdrop remains strong, driven by robust real residential investment, home price appreciation, which continues to encourage homeowners to engage in discretionary projects."

Home Depot (11/13/18):

• "And as we look at the future and what’s happening, fundamentally, you got to look at the economy and the economy is good. People are employed, they have more income, they’ve got more to come with tax reform. So fundamentally, we feel very good about just the drivers of the spend in our business."

Then the Fed Threw a Wrench Into FY4Q

As the following chart illustrates, the first two months of the January quarter likely felt the pain of higher interest rates and steep stock market declines:

How Was Retail Impacted? We Read Through the Mixed Signals

1. Holiday sales reports from mall retailers were disappointing‍

2. Walmart bucked that trend to report broad-based strength, but acknowledged fewer tailwinds in 2019

Walmart (2/19/19):

• "Walmart U.S. continued to have great sales momentum. Comp sales excluding fuel grew 4.2% in the quarter and 6.8% on a 2-year stack basis, the best result in 9 years."
• "I think we’re just recognizing that this last year had some tailwinds in it that this year we won’t have."

3. Home improvement ecosystem shows mixed signals, with signs of weakness but also some green shoots in January and February:

Additional Variable on the Horizon: Smaller Tax Refund Checks Could Pressure Consumer Spending in 1H

The second weekly update from the IRS shows tax refunds this season are -16% in quantity (pointing to delays) and -8.7% in average size when compared to the same period last year.  As we wrote about last week, we see this as an emerging risk for consumer spending in 1H.

Company Specific Hot Button Issues to Watch

1. Look for an update on Lowe's execution challenges as new management looks to drive efficiency

Lowe's (11/20/18):

• "Our inefficient reset process continue to create disruption in our stores and contributed to out-of-stocks.  In fact, all of our categories with negative comps: millwork, paint, fashion fixtures and flooring were pressured by poorly executed resets."

2. Is a revived Lowe's getting more competitive? Potential for a Home Depot response?

Home Depot (11/13/18):

• "We’re certainly seeing much more promotional activity as folks have made decisions to close stores and liquidate inventory."
• "As far as inventory categories, we’re not going to give specific about where we invested for competitive reasons."

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This communication does not represent investment advice. Transcript text provided by S&P Global Market Intelligence.

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