Hurricane Season - Not a Disaster for Home Depot

Includes: HD, LOW
by: Paul Walsh

Home depot line

The prognostications for the 2009 hurricane season are already queuing up, with Colorado State University and Weather Services International already releasing their expectations for the number and intensity of storms expected in 2009.

Hurricane table

Both forecasts are indicating another active year, with both the number of storms and probability of landfall higher than the long-term average. This is not surprising in that we are currently in a long-term and naturally occurring period of enhanced hurricane activity related to a phenomenon known as the North Atlantic Multi-decadal Oscillation [AMO].

The AMO is a secular (20 to 30 year) fluctuation between warmer and cooler than normal ocean temperatures in the North Atlantic. We are currently in the warm phase of the AMO, which correlates to increased hurricane activity -- this cycle is expected to continue until at least 2015.

Amo graph

Needless to say, hurricanes and (as important) the threat of hurricanes drive dramatic and volatile consumer reactions which leads to tremendous sales spikes in hurricane-related product categories.

For businesses like Home Depot (NYSE:HD), hurricanes create customers. While they understandably don’t like to trumpet sales and marketing opportunities related to hurricanes, HD garners both tangible and intangible benefits from storms. The intangible benefits are related to the positive national media exposure they gain with each storm threat. The tangible benefits are self evident – sales!

In its Q3/2008 earnings call, HD noted that Hurricane’s Ike and Gustav drove an additional $125 million in sales in the Gulf region, although they qualified that statement by saying those sales were offset by increased shipping costs, damaged stores, labor issues, etc.

The reality is that HD is becoming more sophisticated and more effective every year at managing its supply chain in response to hurricane threats.

Practice makes perfect.

Its ability to move product and be in stock to capture the demand surges related to hurricane predictions puts them in the enviable position of being both a valuable partner to its customers and a producer for investors.

From both a long term – through at least 2015 – and relatively short-term (Q3/2009) perspective, the projections of active hurricane seasons bodes well for HD and the entire Home Center sector, including Lowes (NYSE:LOW).

Disclosure: WMT, M