Home Reno Sector still facing Economic Headwinds

Lowe's (LOW), the smaller competitor to housing renovation giant Home Depot (HD) found its stock slipping nearly 10% today on disappointing revenue and earnings numbers for its 2nd quarter. As money has been flowing this year into the more established names in anticipation of recovery, Lowe's had an opportunity to showcase its smaller and leaner business model, however the difficult economics have proved to be increasingly challenging. Year To Date now Lowe's sits 4% in the red, while Home Depot has been a 14% gainer, despite a nearly 4% tumble today.

Lowe's profit fell 19% year over year to $759Million or $0.51/share, which fell short of expectations of $0.54/share and on the top line Revenue fell to $13.8Billion, down from $14.5Billion a year ago.

But housing data is getting better right? Not everywhere and not consistently is the message from these numbers, while housing prices and housing starts are beginning to improve on a year over year basis, they are against comparisons coming from drastic lows that were reached during the meat of the global recession. With the jobs numbers being what they are, it's difficult to imagine the current economic environment being a hotbed for home renovations or substantial new developments. As North America begins to slowly drive itself out of the recession, Lowe's sees some leveling out of demand as it experienced growth in foot traffic in its stores throughout the quarter, however talk from management is mostly about expectations resetting and difficult consumer conditions, and with big ticket purchases (those over $500) falling 16% year over year it is easy to see why management would speak conservatively.

Top line profit forecasts were also trimmed at Lowe's for the year by $0.04, and the company is slowing its store building. It planned about 66 stores this year and now only has plans for 45 next year. But even with an American consumer getting more confident towards the end of the year, is there going to be enough bite for the big ticket items Lowe's and Home Depot rely on for profitability. If Cash For Clunkers showed anything, its that the consumer can be tempted with a good deal, albeit one sponsored by the government. However with hundreds of thousands of Americans having now just spent copious amounts of money on new cars, will they have anything left for their homes before the end of the year?

Disclosure: Author holds no position in the companies mentioned

Tool Time with Lowe's & Home Depot

The markets had a strong start to the week, led mainly by Bank stocks and the Tech sector. However, the two biggest names in Home Improvement were also on tap to deliver results. Lowe's (LOW) delivered Monday with bigger brother & competitor Home Depot (HD) coming in on Tuesday.

During Monday's bullish day, Lowe's was able to capitalize on results that beat expectations and climb 7% utilizing its first-reporter advantage. Now although profits fell 22% year over year, expectations were for a more severe drop. Income came in at $476Million vs $607Million in the year ago quarter ($0.32/share), while on the top line, Revenue was $11.83Billion vs $12.01Billion, a drop of 2%.

Compared to expectations of $11.63Billion in Revenue and $0.25/share in Income, it would appear that Lowe's is holding onto business at a better than expected clip. However, talk from traders, and what was wildly reported by the Investment media was that the expectation beating results were driven primarily by cost-cutting, as top line Revenue numbers were rather muted.

Lowe's did its best to try and appease Investors by guiding higher for next quarter with a range of profits from $0.51 to $0.55 per share, compared to Wall Street's numbers of $0.50 per share in earnings. Lowe's continues to pay its quarterly dividend, with a yield standing at about 1.7%.

Housing data coming out Tuesday morning along with results from Home Depot were worrisome to Investors at the start of trading. Housing starts, which is a big part of the Home Depot and Lowe's business models fell 13% to a record low in April, according to the latest figures. These headlines took much steam of out of a pretty good Home Depot report which largely mirrored Lowe's from the day before. Once investors digested the news, there was a few points that could act as silver linings for bullish traders. First off, the number was actually better than the forecast by economists (485000 vs 525000 expected), and second, a majority of the drop off was due to condos and related living fixtures. An area of the Home Improvement sector generally not suited to the repeat home renovation business that both Lowe's and Home Depot rely heavily on. Case in point, the number of new pure housing starts actually rose by nearly 3% in April, which provided some good news in this sector, hence the rebound in Lowe's stock to near break even territory.

The Home Depot stock story today, is unfortunately not as rosy, as many buyers of the stock yesterday retreated today, selling on the expected earnings news. Nearly a 10% drop in Revenue to $16.2Billion was met with mixed reaction even though profits were above expectations, mainly due to cost cutting. Ex-items Home Depot earned $0.35/share versus analyst expectations of $0.29/share, which had been baked into the stock already given Lowe's nearly identical performance just a day ago. Home Depot lost around 4% this morning and hasn't seen the same uptick as its smaller competitor after the housing report had been looked over. Home Depot has the added benefit of a dividend yield, twice the size of Lowe's for those keeping score.

These stocks will largely trade in tandem, as the economy recovers as both are similarly priced to earnings and both have the cushion of a dividend yield for the more conservative Investor. With foreclosures still likely to rise in the near future and the unemployment number still showing no signs of turning back around for now the time to invest in these names will still present itself later in the year. You can only go so far on cost cutting alone, and Wall Street will only celebrate this type of approach for a few quarters before some real questions have to be answered on the conference calls. For now both should be a Hold, but as economic indicators improve and the work force stabilizes and begins to grow again, there will be a surge of pent-up Home Improvement demand going into 2010. There will still be time to own these names, but for a longer term play LEAPS should be in the investment cards for some potential high-powered Tim Taylor style returns.

Disclosure: Author holds no position in HD, LOW

Home Improvement Retailer Earnings, Lowe's beats

Binford Tools is proud to present, quarterly earnings for America's Home Improvement retailers, starting with Lowe's (LOW). If whispers on Wall Street carry their typical pre-numbers influence, market's were looking for a confirmation that Tim Taylor's been telling his Cable TV audience Lowe's is in a better position than its bigger rival Home Depot (HD).

Many are expecting Home Depot to post another declining quarter, but for Lowe's results were mixed, skewed positive. While Profit dipped 8% to $0.64/share it was still better than analyst expectations of $0.56/share. Top Line revenue actually grew this quarter by 2.4%. An anomaly maybe, during an economic slowdown, due to the stimulus package approved by the Federal Government, but nonetheless an increase. And when considering Home Depot customers received the same stimulus, yet the street expects declines, it paints a slightly better picture for Lowe's. Granted neither company's outlook portrait will resemble the Mona Lisa anytime soon.

Lowe's had some positive to say in fact, as it increased the range of it's full year profit forecast from between $1.45-$1.55 per share to a range of $1.48-$1.56 per share. The vital thing here was raising the bottom for analysts allowing them to price Lowe's at a slightly higher multiple.

Coming from the lows, a terrible form of humour I know, Lowe's has rallied into these quarterly results. Up 23% over the last month, which is stretching both trailing P/E and forward P/E ratios away from those of HD.

While the economy is on the hearts and minds of traders, the feeling around the Home Improvement retailers is more of a wait and see approach, treating the government stimulus package as temporary relief. There isn't a growth or turn-around possibility here just yet. While Lowe's stores open more than a year had smaller sales declines than some expected, the fact remains that it's a tough investment pitch until Americans get back to comfort levels where they can renovate their homes, and with Lowe's being centralized in the US and Canada, that may be 6-12 months away yet. So until '09, I don't think so Tim.

Disclosure: Author holds no position in any of the above mentioned companies

Home Depot Feeling the Effects of an 'ill consumer'

America's cornerstone home-building-renovating retailer Home Depot (HD) released quarterly earnings numbers pre-market but most of the damage had already been done through lowered expectations as the housing and credit mess in the United States started to spill over into the general economy.

Simple fact: Lots of bad mortgages, and corresponding foreclosures mean that folks aren't likely to go out and buy that circular saw and loads of 2x4s for that 2nd story home extension. Expectations had been lowered tremendously for Home Depot on a year over year basis and the company only grazed by when using typical Wall Street accounting math.

Earnings fell over 60%, from $1Billion to $356Million ($0.21/share) and at the top line, Revenue fell from $18.5Billion to $17.9Billion. While Revenue was generally in line with expectations it took adjustments for Home Depot to match profit expectations. Since expectations were $0.37/share on a non-adjusted basis, HD revealed that it in fact would've had a more profitable quarter if it didn't take a charge for closing stores and filing away plans for future openings. Accounting for these charges, HD would've earned $0.41/share and would have beaten expectations by 4 cents. So why the 5% drop in the stock today? Investors surely can't blame oil's run to $130 a barrel for everything! Well, it's because of the fact that a company like Home Depot, which has an increasingly aggressive competitor in Lowe's (LOW) nipping at its heels, is closing stores (15 in the latest quarter) and putting the kibosh on new store plans (50 stores scrapped).

Investors are certainly spooked enough to think that the housing mess hasn't in fact bottomed and that these home improvement superstores will continue to be under pressure for some time in terms of profitability. So how does Home Depot win back some Wall Street love? By putting its name out there, into the minds of consumers. Yes the housing mess isn't in fact completely behind the market, and yes consumers are increasingly cash strapped due to high gas prices but that doesn't mean the Depot is allowed to sit on its hands and blame the economy.

Management needs to get on that soapbox and come up with some growth strategies beyong the tired "current economic climate is unstable". While all may not be well in the US, a place where Home Depot has almost 2000 of its 2200 some-odd stores, there are plenty of opportunities abroad. The company operates 12 stores in China, and it is very likely that its next wave of growth will significantly be tied to overseas expansion. A roadmap would do wonders to an increasingly skeptical Investment Community. Oh and of course it doesn't help when you shelve almost half of a remaining $22.5Billion share buyback progam.

Disclosure: Author does not own HD, LOW

See-saw Trading leaves Markets with a Positive Monday

North American Markets hovered around the flat line early Monday morning as Friday's Fed induced buying didn't spill over into this week. Stocks drifted lower midday but recovered to end slightly higher by the end of the day. The Dow picked up 40 points and the Nasdaq 3. Canadian markets were higher as well with the TSX faring better than its American counterparts.

Perhaps some signs of relief were seen today as home renovator Lowe's (LOW) reported good quarterly numbers sending the stock higher by 6%. With the home crisis cloud hanging over the home builders and renovating stocks investors seemed relieved that Lowe's was able to somewhat weather the storm. The financials, which led the week-end charge last week fell overall today as the major US banks were lower across the board.

Technology stocks got a boost from positive comments surrounding Research In Motion (RIMM) as the Blackberry maker prepares for its 3 for 1 stock split. This wasn't enough to cause an extended rally in technology shares as the sector was mainly flat for the day.