After a brief period of stagnation, mainly as a result of rising interest rates last year, the US housing market seems to have regained its footing. The most recent macro numbers on the state of the market were encouraging, which is good news for a range of industries. One of these natural beneficiaries of an improvement in the housing market is the home improvement industry. The two major players in the space, Home Depot (NYSE:HD) and Lowe's (NYSE:LOW), just came in with their results, which back the thesis of housing market strength.
The bigger picture: July
Let's first take a look at the most recent figures on the health of the US housing market in order to put these earnings in perspective. In July, new housing starts surged by 15.7% to a seasonally adjusted annual pace of 1.09 million units for the best tally since November, after two months of declines and beating analyst expectations.
By segment, single-family homes starts, which account for the majority of homes built in the US, increased by 8.3%, while starts in the more volatile multi-family home segment increased by a huge 33% to reach the highest level since 2006.
Year-to-date, housing starts up by 22%, although some analysts fear that the possibility of higher mortgage rates, combined with sluggish income growth and higher prices could put a damper on the market's growth in the second half of the year. Still, an 8.1% increase in applications for housing permits in July signals that the market may have more room to run.
Earnings: Home Depot and Lowe's
Home Depot is the world's biggest home improvement store chain, with more than 2,250 locations. The company's second-quarter report was a resounding success. Net income soared 14%, with EPS of $1.52 rising by 22.5% year-over-year and comfortably beating the $1.44 consensus estimate. Meanwhile, overall revenue climbed almost 6% to $23.81 billion, also beating estimates.
Clearly, the company is benefiting from a continued resurgence of the US housing market, a thesis also backed by the company's CEO, but there are other bright spots in the report to consider. Comp store sales rose by a healthy 5.8%, and online sales increased by an impressive 38%. Following the results, the company raised its guidance, and now expects to earn $4.52 per share for the full year versus a previous estimate of $4.42 per share.
Lowe's, Home Depot's smaller competitor, also came up with some encouraging results, although growth wasn't quite as rapid. For the quarter, diluted EPS rose more than 18% to $1.04 to just about beat the consensus, with net earnings up by 10.4%. Sales increased by 5.7% to almost rival Home Depot's growth, but same-store sales weren't quite as strong, with a 4.4% increase.
However, the report wasn't received well by investors, as the company lowered its full-year outlook. Sales growth for the year is now projected at 4.5% versus a previous 5%. Also, Home Depot's higher same-store sales growth suggests that it has pinched away some market share from Lowe's. All in all, though, the report follows the general trend of an improving US housing market.
After a brief lull, the US housing market seems to be back in gear. July's housing numbers came in ahead of expectations, as housing starts rose to the highest level since November. As such, one would expect home improvement retailers to benefit. For the most part, this is the case. Home Depot came out with some excellent numbers, as did rival Lowe's, although Lowe's did disappoint somewhat with its lowered sales guidance for the year.
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