Lumber prices have been on a wild ride since the pandemic onset. The price, measured per thousand board feet, was around $400 in December 2019, before the outbreak. It fell to $236 in April 2020 before skyrocketing over the next year, reaching almost $1,700 in May this year. The price started crashing as economies were reopening, falling to nearly $400 in August. Now, it's surging again, trading at $755 as of this writing.
Home improvement retail giants Home Depot (HD -1.77%) and Lowe's (LOW -1.40%) sell a lot of lumber to professionals and do-it-yourselfers. Therefore, changes in lumber prices can have a significant impact on their business. Let's look at Home Depot and Lowe's and see if the recent lumber prices increase is good or bad news.
Image source: Getty Images.
Increasing lumber prices decrease spending at Lowe's
Lowe's last reported quarterly financial results on Aug. 18, for the three months ending July 30. Its fiscal third quarter will include results for August, September, and October. And the price of lumber did not start rising again until mid-September. So for the first half of its third quarter, lumber prices hovered at lower levels. Lowe's investors are hoping management secured purchases for large quantities of lumber at those prices.
Lowe's merchandise inventory was already up to $17.3 billion as of July 30, an increase from $13.8 billion the same time last year, and $655 million of that was related to higher prices for commodities primarily attributed to lumber.
From a customer viewpoint, management noted that folks pulled back spending on projects that required lumber in the mix. That's a typical consumer response; when prices go up, quantities purchased decrease. However, management also noted that when the cost of lumber was falling in the first few weeks of August, customers were spending more on the commodity.
Thankfully, Lowe's has implemented digital pricing protocols at most of its stores, reducing the time employees spend walking around adjusting the prices of products to account for changes in materials cost. That capability might be paying for itself during all the lumber price volatility. Still, the rapidly changing prices and especially increases in lumber prices are not good news for Lowe's, and it's likely discouraging some customers from going forward on projects they would otherwise undertake.
Image source: Getty Images.
Home Depot has a customer-friendly policy on lumber prices
While commodity price volatility is harmful to Lowe's, it is more so for Home Depot. The company has a customer-friendly policy on the matter that could be detrimental to near-term profitability. Here is CEO Craig Menear addressing the company's stance on 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.
That means Home Depot absorbs higher prices for a while before passing them along to customers and drops prices soon after commodity prices decrease. In other words, Home Depot is willing to take a hit on profit margins to provide customer-friendly pricing. This policy may gain customers' loyalty over the long term but hurts profit margins during such volatile price changes as what's going on with lumber right now.
Data by YCharts.
Fortunately for both Home Depot and Lowe's, they operate with healthy gross profit margins and can absorb decreases in the metric with minor damages. Furthermore, Home Depot's customer-friendly policy is apparent in its decreasing gross profit margin, while Lowe's expanded from 2020 onward (see chart). The trend is likely to continue with Home Depot suffering more damage to gross profit margins with lumber price volatility.
Still, this is no reason to choose Lowe's over Home Depot when considering a home improvement retailer stock to buy. The benefits of Home Depot's policy could come forth over the long term through higher customer loyalty.
