Lumber prices are going through some unusual volatility since the onset of the pandemic. The price per 1,000 board feet of lumber initially fell in March of 2020 to below $200. It swung between $500 and $900 through the rest of 2000 before shooting up to over $1,600 per 1,000 board feet in early May 2021. The peak price of $1,686 reached in May of this year likely caused some consumers to pass on projects because of the sticker shock.
The crash in the price of lumber since that peak will certainly benefit consumers, as it now sits at $466 per 1,000 board feet. That's sure to make some home-improvement projects more affordable. But will lower lumber prices hurt profits at Home Depot (HD 0.28%)? Let's take a closer look.
A wild ride
Ted Decker, Home Depot's chief operating officer, had this to say about lumber prices in the company's second-quarter earnings conference call:
This was another historic quarter for lumber price volatility. During the first few weeks of the second quarter, prices for both framing and panel lumber reached all-time highs ... . While pricing for both framing and panel has come down from the peaks, the average price during the second quarter was still significantly higher than the same period last year.
Decker's comment suggests that Home Depot wasn't shielded from the lumber price changes and didn't get the opportunity to mitigate the effects through hedging practices or bulk-purchasing arrangements.
CEO Craig Menear also addressed lumber-price volatility:
[When it comes to pricing goods] ... we always have a philosophy that we want to lead the market down and lag going up to remain as competitive as possible for our customers, and that actually created an impact which in this quarter was unique that we normally don't see.
Basically, when prices for materials go up, Home Depot is slow to raise prices in the store. Conversely, when prices for materials go down, Home Depot is quick to lower prices. In both directions, Home Depot's policy aims to benefit customers at the expense of its profit margins.
It's no surprise, then, that crashing lumber prices hurt profit margins at Home Depot in Q2. The gross profit margin was 33.2% in Q2, which was down by 80 basis points from the year before. The fall in lumber prices accounted for three-fourths of the fall in the gross profit margin.
What this could mean for investors
The good news for shareholders is the negative effects on profits are likely to be contained in Q2. Moreover, the fall in lumber prices is leading customers to take on projects they had put on hold. Along with project uptake on the upswing, lower lumber prices could positively affect sales and profits in Home Depot's third quarter.
Still, it may not be the end in volatility for the cost of lumber. The Delta variant could jam up supply and boost prices again. Shareholders and potential investors in Home Depot stock should be mindful of lumber-price fluctuation and its effects on the company.