Earnings News: Home Depot Inc (HD) Profit Jumps 36% As Housing Sector Recovery Gains Strength

The U.S. housing sector is showing steady signs of improvement after Home Depot Inc. (NYSE:HD), the world's No. 1 home improvement retailer, reported a 36 percent jump in fourth-quarter profit, signaling an improving U.S. job market encouraged Americans to spend more on renovations. The news comes after separate data Tuesday revealed U.S. home prices rose more than expected in December, according to the latest Case-Shiller Home Price Index. Over last year, prices rose 4.46 percent, topping estimates for a 4.3 percent increase.

Home Depot's fiscal fourth-quarter net income rose 36 percent, to $1.38 billion, or $1.05 per share, compared with $1.01 billion, or 73 cents per share, a year ago. Analysts had expected strong earnings from Home Depot Inc., driven by an ongoing housing recovery after an increase in groundbreakings for single-family homes at the end of 2014. The data signaled the housing market could be accelerating after years of stagnant growth following the Great Recession.

Housing starts, a critical indicator of U.S. economic strength, ended 2014 stronger than expected, up 4.4 percent, to an annual rate of 1.089 million, the Commerce Department said last month. The housing sector is a key part of the U.S. economy, and it has an effect on key industries that drive growth, such as employment, construction, manufacturing and real estate. Analysts use earnings from the big-box home improvement retailers to gauge the strength of the housing sector and future construction activity, which also signals whether there will be future employment opportunities in areas such as construction.

Data last week painted a mixed picture for groundbreaking on new homes in 2015 after U.S. housing starts fell 2 percent in January from a month earlier, to a seasonally adjusted annual rate of 1.065 million, the Commerce Department said Feb. 18. Building permits, a bellwether for future construction activity in the coming months, fell 0.7 percent last month, to 1.05 million units.

The broader trend over the past 12 months, however, shows that the housing sector is gradually healing following the financial crisis. Housing starts rose 18.7 percent in January from a year earlier, while permits increased 8.1 percent. Although home construction has been choppy since the recession, housing starts rose around 19 percent from a year earlier in January, signalling steady progress.

The disconnect between choppy data on groundbreaking on new homes and steady strength in home prices signals that Americans are spending more on home renovations. “Many people aren’t moving, and they’re spending more on home goods and improvement,” Patty Edwards, managing director of investments for the Private Client Reserve of U.S. Bank in Seattle, Washington, said to International Business Times in November 2014. “They’re catching up.”

Meanwhile, with the U.S. Federal Reserve widely expected to hike interest rates in 2015, “now is a good time to refinance,” Gregory Daco, chief U.S. economist at Oxford Economics, said.

“Housing activity is still growing at a lackluster pace with housing starts and building permits, the latter of which is a leading 'weather-proof' indicator, around 1 million units in January,” Daco said in a research note Monday. “We foresee pent-up demand, rising incomes and underlying fundamentals helping induce a gradual housing recovery in 2015.”

Strength in home improvements will also be tested Wednesday when Lowe's Companies Inc. (NYSE:LOW), the world’s No. 2 home improvement retailer, posts its fourth-quarter and full-year results. The company beat earnings and revenue estimates in the third quarter and raised its full-year earnings and sales forecasts after homeowners boosted spending on renovations. The company expects full-year earnings per share of $2.68, up from $2.63. Same-store sales rose 5.1 percent in the third quarter. The company predicts an increase in same-store sales of between 3.5 percent and 4 percent for 2014 from its previous forecast of 3.5 percent.

Lowe’s is expected to report fiscal fourth-quarter net income of $420.83 million, or earnings per share of 43 cents, on revenue of $12.31 billion, compared with $325.62 million, or earnings per share of 31 cents, on revenue of $11.66 billion during the same period a year ago.

Over the past year, shares of Lowe’s have gained more than 56 percent, to $54.47, according to Reuters’ data.