Home Depot and Lowe's Laying the Foundation for Recovery with Little Help From the Housing Market

The housing market that was at the epicenter of the financial crisis has yet to approach a full-fledged recovery, but that hasn't stopped the nation's two biggest home-improvement retailers from rebuilding.

The Home Depot Inc. (NYSE: HD) and Lowe's Cos. Inc. (NYSE: LOW) both topped analysts estimates in the fourth-quarter, as more Americans undertook "do it yourself" projects and edged back into purchases of big-ticket items.

Home Depot's total revenue for the quarter ended Jan. 31 fell to $14.57 billion, but net income swung to a gain $342 million, or 20 cents a share, from a year-earlier loss of loss of $54 million, or 3 cents a share.

Analysts surveyed by Thomson Reuters had predicted a profit of 17 cents a share on $14.07 billion in revenue, including a 2.8% decline in same-store sales.

The company saw a 1.2% increase in same-store-sales, which was the first increase since the second quarter of 2006. And a 1.7% decline in sales of big-ticket items was a marked improvement from the previous quarter's 7.1% decline. The number of transactions at Home Depot increased 2.1% in the fourth quarter, another improvement from the third quarter's 0.3% dip.

Meanwhile, rival Lowe's reported a profit of $205 million, or 14 cents a share, for the three months ended Jan. 29. That's up from $162 million, or 11 cents a share, a year ago. Revenue increased 1.8% to $10.17 billion as same-store sales edged down 1.6%, whereas most analysts anticipated $10 billion in revenue and a 3% decline in same-store sales.

Still, the fourth-quarter of 2009 was the 14 th straight quarter in which Lowe's posted negative same-store sales, which shows just how much the company has suffered from the double whammy of the housing downturn and high unemployment.

Only now are consumers again testing the waters of big-ticket purchases - purchases of more than $500. Fourth-quarter big-ticket sales fell 1% from a year earlier, a significant improvement from the third quarter's 10% drop.

"It was positive that at long last Lowe's big-ticket category sales brightened amid momentum in carpet, flooring, and kitchen cabinets," Brian Sozzi, an equity research analyst with Wall Street Strategies, said in a research note. "We think what you are seeing in the numbers from Home Depot and Lowe's is spend by those people in their homes feeling more confident from when median home values troughed in January 2009."

However, Sozzi also urged caution as the U.S. housing market, which is so vital to the companies' business, has yet to mount a serious comeback.

"The trends are clearly showing improvements, but that doesn't mean that improvements will continue," he said.

For instance, The Standard & Poor's/Case-Shiller 20-city composite index in December fell 0.2% from November, but after adjusting for seasonal factors, home prices were up 0.3%. That was the same change that the index showed in November.

Robert Shiller, the Yale University economist who co-founded the index, called the home-price rebound during the second half of 2009 "the most dramatic turnaround" since he began charting home prices in 1987. Home prices fell by 11% between November 2008 and April 2009, before rising by around 5% over the following six months. The last time home prices swung so sharply was in April 1991, when a 5% decline in the first six months of the year was followed by a 2% rally.

But what followed that reversal?

"Nothing," Shiller told The Wall Street Journal. "The home market was absolutely dead for the better part of a decade after that."

Similarly, home sales surged 28% from September to November 2009, giving hope to prognosticators who declared the housing crisis over, but then plunged some 17% in December - the biggest monthly decline since the National Association of Realtors (NAR) began keeping records in 1968.

Money Morning Contributing Editor Martin Hutchinson pointed out at the time that much of the run-up in purchases was the government's tax credit for first-time homebuyers, which was originally set to expire last November.

The homebuyers tax credit has been extended to include deals signed by April 30 and closed by June 30.

"What you will see is another spike in home sales leading up to when the tax credit is set to expire again in the spring," Hutchinson said in an interview. "There will be a small blip around April, but that's all."

The market will languish after that, Hutchinson said, as the U.S. Federal Reserve stops its purchases of mortgage-backed securities and mortgages become harder to obtain. The Fed is scheduled to end its purchases of mortgage-backed securities on March 31.

Still, analysts remain relatively bullish on Home Depot and Lowe's in spite of the housing market's travails.

"We continue to believe that both HD and Lowe's are too big and too important to ignore and while the stocks have run and aren't ‘cheap'; on printed expectations, we believe the global investor demand to own these stocks as a proxy for the turn in the U.S. housing cycle is substantial," RBC Capital Markets Corp. analyst Scot Ciccarelli told clients.

Ciccarelli recommends buying Home Depot shares if they come under pressure.

Home Depot yesterday (Tuesday) for the first time in three years boosted its quarterly dividend to about 23.6 cents a share. For the full year, the company forecast sales growth of 2.5% and said earnings from continuing operations will rise approximately 15.5% to $1.79 a share.

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