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Housing-Related Retailers Still Awaiting Consumers

Posted: Aug 21, 2009 10:59 AM by Greg Sushinsky

Tickers in this Article: BLDR, HD, LOW, SHW, SHLD

Despite putting the best face on another shaky earnings report, Lowe's Companies (NYSE: LOW), delivered more-of-the-same results in its recent second quarter. Profits were down 19%, revenue fell year-over-year and the market punished the stock by dropping it 10% on the day of the earnings release. Lowe's, which sits both in the retail industry and is also affected by on housing industry trends, continues to search for the return of customers.

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Retail Consumers Down
The consumer continues to be missing at Lowe's, as they have fled from spending, beaten down by the forces of the recession. Same-store sales were off 9.5%, and revenues slipped to $13.84 billion from $14.51 billion in the second quarter a year ago. Net income was $759 million, down from $938 million, or 51 cents a share as opposed to 64 cents per share in last year's same quarter. The company's outlook is for $1.13 to $1.21 for the year.

Lowe's and the home improvement industry has been assaulted by the consumer's flight from all retail, plus the spillover of the negative effects on anything related to the housing industry, from new home construction to sales of existing homes as well as remodeling. Lowe's shares this diminished vigor in the recession with others in its industry, most notably Home Depot (NYSE: HD), which also reported earnings recently, with a 9% drop to $19.07 billion in revenue, and 66 cents a share earnings, including charges. Wall Street reacted only slightly better to Home Depot's news, despite sensing that it is at least a bit ahead of Lowe's and is regarded in some quarters as better managed, with its marginally brighter news of an increase in total store transactions and more encouraging news out of Florida and California, two particularly hard hit areas.

Commercial Consumers Staying Away
Home improvement or remodeling isn't just a retail consumer industry, though, as contractors are part of the customer base of Lowe's and Home Depot, too. To show how badly the contractor aspect has been hit, look at Builder's First Source (Nasdaq: BLDR), which sells structural building products for new construction, and has been deep in red ink with continued projections along those lines.

A clearly related home-improvement business, Sherwin Williams (NYSE: SHW), the paint retailer, which despite its solid performance over the years has also felt the sting of both its residential and commercial customers' newfound allergy to buying. Same-store sales in its recent earnings report were thrashed to a minus 14% level.

When Will Home Improvement Improve?
Though it's hard to believe, the dismal numbers on new housing construction have improved, as it is up 37% from the bottom last winter. This, however, is not to disguise the ugly reality that in absolute numbers, housing construction has yet to recover. But it's a positive direction, and there are other indicators in the economy that things may be starting to pick up.

Bottom Line
Lowe's, Home Depot and the others will have to see a return of the consumer if they want to regain any of their previous profitability. And though the consumer has been rumored to be returning for the past couple of quarters, there hasn't been anything concrete enough to suggest that the return is full-fledged. The next couple of quarters, which will include back-to-school sales and Christmas, may find general retailers emerging, though tepidly, ahead of the home improvement retailers as anything housing related, including remodeling, has a much longer way to go. Wait for Lowe's and Home Depot to improve their business results before thinking of buying their stock. (To learn more, read Why Housing Market Bubbles Pop.)

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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