This week, Home Depot (NYSE: HD ) and Lowe's (NYSE: LOW ) both reported their fourth-quarter numbers. Today, I'll be discussing the twin titans of home improvement together -- not because they don't deserve separate articles, but because the whole of the news is greater than the sum of its parts.
Home Depot reported that its sales grew 1.5% to $17.7 billion in Q4 2007. But management quickly qualified that statement, noting that because of an extra week in this year's fourth quarter, a week-by-week comparison actually showed sales falling 4.7% on a 8.3% comps decline.
Per-share profits dropped to $0.40, a 13% decrease compared to last year when you include discontinued items from the sale of Home Depot Supply, and a 5% slump when you exclude it. The extra week accounted for 10% of those profits, though, making the actual results even worse than reported.
Lowe's reported a day before Home Depot, and in some respects, its results were (relatively) better than its rival's. In other respects, they were much worse.
The bad news was that sales dropped 0.3% on a 7.6% decline in comps. The good news is that neither of these drops was quite as bad as what Home Depot would have reported, had its fourth quarter totaled the usual 13 weeks. And the worst news was that Lowe's profits tumbled 30% to $0.28 per diluted share -- a significantly steeper drop than Big Orange witnessed.
Both Big Orange and Big Blue used the dreaded c-word to describe where things go from here. Home Depot CEO Frank Blake warned that: "We see the home improvement market in 2008 as challenging." Lowe's boss Robert Niblock echoed the sentiment.
As far as guidance goes, Home Depot predicts:
- A mid to high-single-digit decline in same-store sales in 2008.
- A total sales decline of 4% or 5%.
- As much as a 210-basis-point contraction in operating margin, leading earnings per share to fall by somewhere between 19% and 24%.
Lowe's told a similar tale of fiscal 2008 woe:
- Comps could fall 5% or 6%.
- Total sales will increase perhaps 3% -- but only because Lowe's will continue to build out its store base at an 8% clip.
- Operating margins should slip about 180 basis points, dropping earnings per share by somewhere between 15% and 19%.
Even more relativism
Read those numbers closely, though, and you may notice that while both home-improvement chains see tough times ahead, one is doing better than the other. Whether you focus on comps, total sales, or profits, Lowe's seems significantly less pessimistic than its archrival. There's a reason for that.
According to Lowe's Niblock, Lowe's managed to "capture market share in both the quarter and the year." What's more, Home Depot's Blake confirmed the point: "We think we've still lost share to the market. ... We think we've reversed the rate of our decline, so it's improving. But we don't see in our performance now that we are picking up share to the market yet." If you're wondering why Lowe's stock is up 8% since reporting earnings, while Home Depot is basically flat, there's your reason.
You can draw any number of conclusions from the data above. Mr. Market seems to have decided that Lowe's is beating Home Depot, so it's buying the former, not the latter.
But for my part, I'd go the road less traveled -- but more obvious. Neither of these retailers anticipates a particularly good year in 2008, and no one (with the possible exception of Lehman Brothers) knows when their bread-and-butter housing market will recover. So I'd suggest avoiding both stocks until we get a better picture of where the bigger picture's heading.
Furthermore, I'd suggest avoiding the stock of any vendor, including but not limited to tractor maker Deere (NYSE: DE ) , HVAC specialist Trane (NYSE: TT ) , appliance king Whirlpool (NYSE: WHR ) , or toolmaker Black & Decker (NYSE: BDK ) , whose fate is hitched to Home Depot and Lowe's.
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