December 15, 2021
Forest Products
Key takeaways from Lowe's F2022 Outlook
Our view: The company's 2022 total home improvement demand outlook is modestly negative vs. our 2022 demand forecasts; however, the continued Outperformance of the Pro category likely favors wood products given that more demand is driven by the Pro category than DIY. From a mix perspective, we think that OSB producers such as LPX/WFG/WY are best positioned given their higher exposure to New Residential Construction and Pro segment R&R demand. Lumber producers (IFP/CFP/RFP/WEF/WFG/ WY) are more exposed to the R&R and home center channel than OSB producers. Siding producers such as LPX/JHX are sensitive to R&R, but are more exposed to the Pro sub-segment.
Lowe's 2022 outlook – Management expects the home improvement sector to contract modestly given that the industry benefited from both higher inflation and government stimulus in 2021; management expects commodity inflation to be neutral y/y and no stimulus in 2022. Therefore, Lowe's is forecasting a demand decline in the mid-single digits, with Pro demand expected to outpace DIY during the year. Comp sales are expected to be flat to down 3% as Lowe's aims to outperform the market by 300-400 bps.
The company is seeing some inflationary pressures – Lowe's is seeing higher distribution costs from the long-term impact of global supply disruptions and higher wages due to labor market pressures. The company also expects higher COVID-19 pandemic compliance costs related to new OSHA regulations.
Modernizing the supply chain – The company noted that its legacy delivery model is highly inefficient, with each store functioning as its own distribution node for big and bulky products. The company's new delivery model will result in big and bulky products flowing directly to the customer's home. The entire Florida and Ohio Valley markets have already transitioned to this model, and the rest of the US market will be converted to the new model over the next 18+ months.
Lowe's has seen +24% growth in Pro Segment demand YTD on top of the +18% growth seen over the same time period in 2020 – As the company continues to focus on this market segment, management sees sales growing a 2x market rate over the next several years. Lowe's plans to also grow DIY sales.
Management sees secular tailwinds to the industry for years to come – Firstly, management believes that homeowners confident in the increasing value of their homes will consider upgrades to be an investment rather than an expense. The limited supply of new homes is also causing homeowners to choose to upgrade their existing homes. Secondly, the pandemic has increased the importance of the home, resulting in what Lowe's expects will be a permanent step-up in repair & remodel demand. Finally, Millennial household formation has accelerated and baby boomers are looking to "age in place".