Home Depot And Lowe's Are Loving The Housing Recovery

By Sam Lewis

Second quarter shows big profits for home improvement retailers

Evidence of the housing market resurgence grew stronger on Tuesday. Home improvement retailing rivals Home Depot and Lowe’s exceeded both internal projections and Wall Street’s forecasts.

At Home Depot, every department — from gardening to plumbing — posted positive comparable sales for the quarter. The company recorded profits of $1.8 billion on revenue growing 9.5 percent to $22.5 billion. Comparable store sales also saw a massive increase, climbing almost 11 percent in the last year. These positive numbers allowed Home Depot to raise its full-year guidance on earning per share to $3.60, previously at $3.52. “The second quarter results exceeded our expectations as our business benefited from a rebound in our seasonal categories, continued strength in the core of the store, and the recovering housing market in the U.S.,” said chairman and CEO Frank Blake. Blake believes Home Depot will do even better during the second half of the year.

Meanwhile, over at Lowe’s, the fiscal year outlook was also raised due to big numbers. “Home improvement demand was strong during the quarter, and we capitalized on it with improving execution,” said Robert Niblock, Lowe’s CEO. “We drove a healthy balance of ticket and transaction growth, and delivered solid performances across all product categories.” Net earnings for Lowe’s rose to $941 million, up from $764 million in the second quarter of 2012. Sales jumped more than 10 percent, to $15.71 billion, with analysts’ predictions for the quarter at $15.06 billion. The company’s stores that have been open at least a year increased nearly 10 percent, trailing Home Depot by just one percentage point. This marks the smallest gap in same-store sales between the two since the third quarter of 2010, according to Wayne Hood, an analyst at BMO Capital Markets.

The positive numbers for Home Depot and Lowe’s provide some respite for the 2013 second quarter retail scene, which has been littered with disappointing  results from retailers like JC Penney, Kohl’s, and Macy’s. These reports also show that spending has moved from fashion and other discretionary items, to items for the improvement and upkeep of homes.

Some economists suggest that only middle-to-higher income consumers are buying properties, and subsequently feeling the resurrection of the housing market. There may be some truth to that speculation, as CFO of Home Depot Carol Tome said that Home Depot’s customers tend to be wealthier due to the fact that they are home owners. Mortgage rates have moved to their highest position since fall of 2011, leading to a drop-off in refinancing activity. The price of homes is expected to continue its trend of ascension, and Tome believes that progress in housing recovery has only just begun. Barclays forecasts 6 to 7 percent price gains this year, and 5 to 6 percent gains in 2014.

Tome also noted that investors are most likely spending money at Home Depot. “If you’re an investor group, be it a private equity firm or someone coming in from outside the U.S., you’re not buying property to sit on, you’re buying that property to rent it — and you can’t rent it if it’s not in good shape,” Tome said. Furthering that point, Home Depot’s installation business saw double-digit growth during this year’s second quarter.

Retail analysts say that Home Depot will continue to outperform Lowe’s in sales  at least for the time being. Despite do-it-yourselfers and professional contractors increasing their spending at the same rate, Home Depot gets much more revenue (35 percent of its sales) from professionals than Lowe’s (25 percent of its sales). That gap has been difficult for Lowe’s to close as Home Depot has more stores in populated metro areas, where most contractors are based . However, Lowe’s just made a move that should help narrow that margin.

On August 12, Lowe’s reached an agreement to buy 72 Orchard Supply Hardware Stores. These stores were let go by Sears Holdings in 2012, which led to them becoming a public company. Summer 2013 brought a chapter 11 filing in the U.S. bankruptcy code for Orchard Supply, which let Lowe’s acquire the brand. Lowe’s will operate these stores under the Orchard Supply name in the densely populated markets of Southern California, where Lowe’s is currently not well represented. Filling this hole in Lowe’s geography should help the company gain ground in the contractor sales market.

As housing numbers continue to climb, new construction incentives will spark the sales of building supplies. The demand for in-home items like refrigerators, stoves, washers, dryers, and other home appliances will also grow as property and homes continue to regain their value. As the economy gradually recovers, consumers will gain the confidence to purchase the big ticket items they may have put off during the recession.