Home Renovation Sector Still Faces Economic Headwinds

Lowe's (LOW), the smaller competitor of housing renovation giant Home Depot (HD) found its stock slipping nearly 10% 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 Monday.

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 becoming a hotbed for home renovations or substantial new developments. As North America begins slowly to 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, it is 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

Comments

[specks:]

I listened to Tom Keene interview Patty Edwards who expressed concern cash for clunkers has taken a car payment chunk of $400 a month out of the rest of retail. Sounds logical. And all other sales are down. Plus, stores are short of inventory and that which is available seems to be geared to depression type attitude.

Aug 18 04:42 PM

[ErickMcG:]

The renovation niche will be expanding, as people who would have bought new or bought up now realize they can't get a loan for it and/or they can't afford it to begin with. Families staying put, growing in place, aging in place, by necessity changes the industry focus and the money flow.

Nov 20 04:55 PM