Lumber prices have taken a wild ride since the onset of the pandemic. Folks who were largely cooped at home took to starting home improvement projects, many of which required wood.
Imbalances in supply and demand pushed prices for lumber from $285 per 1,000 board feet in March 2020 up to more than $1,000 for the same amount in September 2020. And though they fell back below $500 just a month later, prices then began to stagger upward again, until March 2021, when they skyrocketed from around $800 for 1,000 board feet to a peak above $1,600 in May.
However, since mid-May, lumber prices per 1,000 board feet have crashed back down and now sit at $490.
Home Depot (NYSE:HD) benefited from those higher prices, as it was able to pass them along to customers. Now, the reversal of that trend could prove to be a drag on the home improvement retailing giant’s financial results in an already challenging period.
A tough comparison
Sales surged for Home Depot in its fiscal second quarter of 2020 (the three months ending Aug. 2). As an essential retailer, it kept operating during a period when many other businesses had to temporarily close. And with folks under lockdown focused on making their homes more comfortable, the retailer’s sales that quarter increased by 23.4% year over year. Interestingly, that sales surge came before the surge in lumber prices.
When Home Depot reports its fiscal Q2 results next month, it will be surprising if it’s able to match the elevated revenue of last year. And with prices for lumber down by roughly 66% in the past few months, that part of its business will likely not help boost the top line.
However, folks still have cash saved from the several rounds of stimulus checks and other stimulative government fiscal policies to help combat the pandemic. That could continue to fuel sales at Home Depot even if it doesn’t result in enough revenue to eclipse the previous year’s levels.
No signs of slowing yet
According to management, the surge in commodity prices, where lumber is the main component, helped increase Home Depot’s sales by 375 basis points in the first quarter of fiscal 2021, which ended Feb. 2. Overall, sales increased by 32.7% from the same quarter last year. Here’s what CEO said about the quarter:
Similar to what we reported in our previous three quarters, the growth in our comp average ticket was driven by elevated project demand, customers’ trading up to new and innovative products, and continued inflation in many product categories, including lumber.
Focus on the long run
Investors should expect volatility in Home Depot’s sales in the next few quarters. The company is entering into unprecedented territory, and no one knows how consumers’ spending habits will evolve in the aftermath of the acute phase of the pandemic.
One thing is for certain, however: The home is going to stay a more important part of people’s lives than it was before the pandemic struck. Remote work appears likely to remain far more common too.
Over the last decade, Home Depot’s revenue grew at a compound annual rate of 6.9%, and that’s roughly what investors should expect from it over the long term. Keep in mind, though — disruptions related to the pandemic may cause fluctuations far above or below that rate in the near term. As always, investors should focus on owning stocks for the long term. In that regard, buying and holding Home Depot stock for a decade or two is likely to make you wealthier than when you started.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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