After more than a year of not spending money on their homes, consumers began refurbishing their kitchens and painting their living rooms in what appears to be the early stages of a comeback for the home improvement industry.
Home Depot and Lowe’s, the nation’s largest home improvement retailers, posted better-than-expected earnings this week. They said that they did not have to turn to discounts as much as they did last year, and that some customers splurged on higher-priced goods and services like carpet installations.
Of Home Depot’s top 40 markets in the United States, all but two showed year-over-year improvement in the most recent reporting period. Some markets in California and Florida, among the states hit hard by the recession, even had sales growth at stores open at least a year, a barometer of retail health.
Frank Blake, the company’s chairman and chief executive, said during a conference call on Tuesday that there was “cause for optimism in 2010,” though he described it as a transitional year, not a year of robust growth.
“Calling the year ‘transitional’ doesn’t sound very exciting,” Mr. Blake said, “but we have been waiting for this transition for a long time.”
For the three months that ended Jan. 31, Home Depot had a profit of $342 million, or 20 cents a share, in contrast to a loss of $54 million, or 3 cents a share, in the period a year earlier. Sales fell 0.3 percent, to $14.6 billion, which executives attributed to store closings. Sales at stores open at least a year were up 1.2 percent — the first increase in years. Also, Home Depot increased its quarterly dividend for the first time since 2006.
On Monday, Lowe’s posted a profit of $205 million for the three months that ended Jan. 29, or 14 cents a share, compared with $162 million, or 11 cents a share, in the period a year earlier. Sales increased 1.8 percent, to $10.2 billion. Same-store sales declined 1.6 percent, but that was still the best performance in more than three years.
Robert A. Niblock, the chairman and chief executive of Lowe’s, said during a conference call that the results suggested “that the worst of the economic cycle is likely behind us.”
Yet while consumers appear to be taking on more discretionary home improvement projects, retailers are still under pressure.
Mr. Blake underscored that the housing industry remained stressed, mortgage defaults continued to increase and unemployment was high. Mr. Niblock of Lowe’s noted that the industry was still contending with “the psychological impact of consumers wondering when home prices will finally bottom.”
Indeed, Home Depot’s professional business — merchandise typically bought by builders and contractors — was weak, though the rate of decline was not as bad as in previous months. The company’s worst-performing categories included lumber, hardware, electrical goods and other high-priced construction-related categories. Lowe’s, too, said sales to its commercial business customers were soft.
Both Home Depot and Lowe’s said that the average amount spent at their cash registers declined from figures in the period a year earlier, though that was not exactly bad news.
“It’s still down, but down a lot less,” Carol Tomé, Home Depot’s chief financial officer, said in an interview on Tuesday. “We were very pleased with that.”
Sales in Home Depot’s most recent reporting period were driven by the kitchen and bath, paint, flooring and plumbing categories as well as its international businesses. Sales in maintenance and do-it-yourself repair categories continued to be strong. So were simple décor-related categories like ceramic tile, carpet, paint, faucets and bath fixtures.
Transactions of $900 or more, which represent about 20 percent of Home Depot’s sales in the United States, declined less than 1 percent. As Craig Menear, Home Depot’s executive vice president for merchandising, put it: that is “a significant improvement compared to double-digit declines in previous quarters in 2009.” He attributed the improvement to consumers snapping up values in Home Depot’s appliances, water heaters and windows categories.
Lowe’s said sales of flooring, cabinets and countertops were strong, a sign that consumers were willing to take on more costly projects.
Both companies said their results were also helped by cost cuts.
Analysts who study the home improvement industry predict a slow recovery. Mike Baker, a research analyst with Deutsche Bank, noted in a research report that the biggest threat to the sector’s recovery “is another leg down in housing, particularly as government stimulus factors dissipate.”
Both Home Depot and Lowe’s predicted business would pick up toward the end of the year. For 2010, Home Depot expects earnings of $1.79 a share, and a same-store sales increase of 2.5 percent. Lowe’s said that for the year it expects earnings of $1.30 to $1.42 a share, and a same-store increase of 1 to 3 percent.
Shares of Home Depot rose 43 cents on Tuesday, to $30.75; Lowe’s fell 26 cents, to $22.81.
COMMENTARY: The potential for a second real estate bubble still exists as foreclosures continue to increase, not just from sub-prime borrowers, but from prime borrowers. The "Shadow Inventory" and housing overhang of 7 million unsold homes (foreclosures, defaults, regular unsold and REO's) is one of the reasons.
The current uptick in real estate prices and sales is only temporary, most of it caused by the $8,000 tax credit for first-time home buyers.
Homeowners and first-time buyers took advantage of the flood of foreclosed properties. Nearly half of the closings were foreclosures. The new owners began to make repairs and other improvements, and this helped boost DIY home improvement sales.
Another factor are loan modifications and extensions before filing notices of default over the Christmas holidays that slowed down foreclosures in the 4th quarter. If history is any indicator, approximately 40% of those will eventually go into default and be foreclosed on, providing an added boost to the Shadow Inventory.
Another reason for the uptick in the DIY home improvement revenues has been the poor weather, with many homeowners purchasing shovels, snow removers and other DIY home items. The arrival of spring also produces an improvement in the DIY home improvement sector as homeowners make minor repairs and improvements to their homes in preparation to show them for possible sale.
Courtesy of an article dated February 23, 2010 appearing in The New York Times
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