By Savyata Mishra
(Reuters) -Home Depot and Lowe's are set to post modest sales gains when they report quarterly results this week, giving investors a read on whether the outlook is improving or consumer caution is still holding back renovation and do-it-yourself spending.
The two major U.S. home improvement chains have faced higher raw material costs in categories such as flooring, hardware and lighting due to President Donald Trump's tariffs, passing some of the increase on to shoppers, although
analysts expect a temporary pause on China duties to offer short-term relief.
The effective tariff rate borne by U.S. consumers has surged to 17.9% this year, the highest since 1934, according to Yale's Budget Lab, adding to strains on household budgets, exacerbated by what was the longest government shutdown in the nation's history.
But the U.S. Federal Reserve cut its benchmark rate by 25 basis points both in September and October, leaving Wall Street analysts optimistic about renewed spending by consumers.
Home improvement retailers are also hoping for a pickup in demand after months of still high rates that prompted homeowners to defer projects that typically require financing, such as kitchen remodels, bathroom upgrades and pool installations.
"The acceleration of existing home sales is likely to spur an improvement in home renovation activity, but will require a combination of improved affordability, lower rates, and higher consumer confidence," said Joseph Gabelli, portfolio manager at Gabelli Funds, which owns less than 1% of shares in both Home Depot and Lowe's.
Analysts expect Home Depot to record a 1.5% increase in third-quarter comparable sales when it reports on Tuesday, versus a 1.3% decline last year, data compiled by LSEG shows.
Over the last 12 months, Lowe's stock has lost about 16% of its value, while Home Depot has declined more than 11%, compared with a 15% increase in the broader S&P 500 index.
Lowe's, which reports results on Wednesday, is seen logging a 1% growth in same-store sales, from a 1.1% drop last year.
Telsey Advisory Group analyst Joe Feldman expects home improvement demand to be led by professional customers, with do-it-yourself customers continuing to take on smaller projects.
To offset softer demand in do-it-yourself activities amid subdued housing activity, Home Depot and Lowe's have stepped up acquisitions targeting professional contractors and builders.
Lowe's bought Foundation Building Materials for nearly $8.8 billion in August, following its $1.33 billion deal for Artisan Design in April. Meanwhile, Home Depot in late June announced the acquisition of specialty building products distributor GMS for about $4.3 billion.
"While 'high interest rates' had been the primary cause for consumers to delay larger projects, that has shifted to broader economic uncertainty, given tariffs and inflation," Truist analyst Scot Ciccarelli said.
(Reporting by Savyata Mishra in Bengaluru; Editing by Alan Barona)
