Home Improvement: Lowe's and Home Depot Bright Spots In Retail This Season

Americans may not spend as much as retailers hope this holiday season, but analysts expect more outlays to flow to home improvements. Quarterly earnings reports from Home Depot and Lowe’s this week are expected to show solid growth in home repairs and remodeling as brighter housing and job markets help homeowners spiff up before end-of-the-year festivities.

Building material sales rose 7.6 percent in September compared with a year ago and 5.1 percent in October, according to federal data. That’s higher than the retail sector’s average 3.7 percent gain in October, excluding cars. Clothing, sporting goods, music, books and general merchandise all posted slower sales growth than home materials in recent months.

“It's pretty clear that the home improvement sector has been taking share from other retail categories,” said Michael Lassner, retail analyst for UBS, in a recent note.

A variety of vendors that sell through Home Depot and Lowe’s have reported growing demand for new home construction and repair products as well as appliances, Lassner said. According to a closely-watched indicator from Harvard University called Leading Indicator of Remodeling Activity, home improvement spending rose 6.1 percent in the third quarter, up from 2.3 percent during the same period last year.

Home Depot has expanded its selection of appliances in 800 stores and is looking to do so in nearly 200 additional stores while Lowe’s has redesigned many stores with more open space to help customers envision seasonal home makeovers.

Sales at Home Depot, which is set to report earnings Tuesday, are expected to rise 5.1 percent to $20.5 billion, according to analysts polled by Thomson Reuters. Profit is expected rise 19.1 percent to $1.5 billion or $1.13 per share. That's despite the company’s security breach that exposed more than 53 million shoppers' credit card data and email addresses to hackers in a five-month attack confirmed in September.

Analysts polled by Thomson Reuters expect third-quarter sales at Lowe’s to rise 4.4 percent to $13.5 billion from a year ago. Profit is expected to rise 24.1 percent to $572 million or 58 cents a share. Lowe’s reports earnings Wednesday.

“Many people aren’t moving, and they’re spending more on home goods and improvement,” said Patty Edwards, managing director of investments for The Private Client Reserve of U.S. Bank in Seattle. “They’re catching up.”

Home improvement sales, with the rest of retail, tanked in 2008 after the real estate bubble burst. The housing market, measured by new home starts, didn’t begin picking up steam until last year but an unusually cold winter halted construction. Then in July, the market rebounded with housing starts that rivaled a post-recession high of 1.1 million.

Private residential investment was $563 billion over the year ended in the third quarter, 37 percent less than its peak of $896 billion in the first quarter of 2006, according to UBS. But property sales continue rising gradually. The bulk of home sales, those of existing homes, grew at the fastest pace of the year in September, and foreclosures are down 14 percent from a year ago, though still 7 percent of all home sales, according to the National Association of Realtors.

“The amount of money that has to go into turning around a foreclosed property is something like $9,800,” Edwards said.

With record-low gas prices, many retailers like department stores are hoping shoppers will spend the savings in their establishments. Macy's chief financial officer, Karen Hoguet, told investors last week though lower gas prices are a positive factor for the retailer, the reality is that customers are spending more of their disposable dollars on items Macy's doesn't sell like electronics and home improvement. Yet, analysts say lower gas prices are unlikely to benefit retailers except for consumer staples like grocery stores, food and beverage vendors and health and beauty stores.

“The bulk of the historical evidence suggests the consumer may not spend their savings at the pump at retail,” said Gina Martin Adams, senior analyst at Wells Fargo, in a note Monday. “Lower gas prices do not usually result in acceleration in sales for U.S. retailers at large.”

For the home improvement sector, rising home prices and improving economic conditions like rising employment and consumer sentiment rather than gas prices are boosting sales, analysts say.

“Underlying housing activity has begun to awaken,” Lassner said.