Housing is up! Housing is down! We're no longer building houses, having decided that tents are actually a much better system! Every week there's a new number, a new forecast, and a new interpretation that means each new report can be read three different ways. Investors have been trying to time the building recovery, waiting to jump in on companies until all signs point to yes. But some home improvement stores are getting by, regardless of the looming recovery. Why not invest now?
When we're looking at home improvement, we can look at two big sections. On the one hand, you have the companies that make it possible to replace a window in your house after that kid with the baseball puts a lob into your living room. These are the Lowe's (NYSE: LOW ) and Home Depots (NYSE: HD ) of the world. On the other hand, you have companies that sell all the things that go into a house, which the previously mentioned kid can knock over at the block party. Seriously, kid, calm down.
The more decorative side includes Williams-Sonoma (NYSE: WSM ) and Bed Bath & Beyond (Nasdaq: BBBY ) . Both have been banking on a recovery for some time, but they have been doing other things to generate new sales. Conversely, Best Buy (NYSE: BBY ) has just been running headlong toward a cliff, hoping that some poor soul who still needs a dryer will jump out to stop it from falling to its death. Everyone is looking for new houses to help them out.
Adding on to the house
This week, Lowe's announced earnings from its most recent quarter. Investors weren't ecstatic about the results, with revenue, gross margins, and net income all falling from their 2011 positions. Much of that decline can be chalked up to a shorter fiscal year, with Lowe's claiming that 1.8% of its 2% decrease in revenue was because of the shift in weeks. But that doesn't explain away the company's drop in same-store sales, which were down 0.4%. That fall is even more disturbing when you compare it Home Depot's 2% gain in same-store sales. As my colleague Tim Brugger points out, Lowe's is lagging behind in a lot of areas, and Home Depot is looking like the only successful game in town.
Home Depot's stock has crushed Lowe's in 2012, rising 34% since the beginning of the year. Lowe's hasn't even beat out the S&P 500, up only 4%. In addition to this quarter's same-store-sales growth, Home Depot has increased operating income by 15% so far this year, with earnings per share up 24%, because of an ongoing share buyback program. Regardless of the housing situation, Home Depot is making it happen.
Filling the house up
Even if new housing doesn't pick up, people will be looking to fill their existing houses with all kinds of stuff. Luckily, Bed Bath & Beyond and Williams-Sonoma have just the thing: everything. Bed Bath & Beyond has had a few bumps this year, but so far the stock is up 15% since January. Williams-Sonoma's stock just managed to jump out of the red last week when it announced surprisingly strong second-quarter results, and now sits up 9% on the year.
Both companies had same-store-sales growth last quarter, with Williams-Sonoma up 4%, and Bed Bath & Beyond gaining 3%. In addition to strong past performance, Williams-Sonoma has finally announced plans for international expansion. Sydney is going to get the first corporate-owned stores outside North America. The 22,0000-square-foot location is going to house a Williams-Sonoma, Pottery Barn, West Elm, and Pottery Barn Kids. Longtime Williams-Sonoma watchers have been dreaming about this day -- or at least I have.
While many other retails are reporting much stronger same-sales growth, compare this to Best Buy's recent performance. In its last quarter, same-store sales dropped 3%. One thing to note on the comparison is that, in this context, the most important area to look at might be appliances. Domestic same-store sales of appliances actually increased 9% last quarter, which is great news. Unfortunately, that was offset by almost every other category, and the overall picture looks horrible.
The bottom line
First, I'll disclose my prejudices, then you can feign surprise at my recommendation. I worked for Williams-Sonoma, and I own one share, which has lost me about $5. I love the company, I like founder Chuck Williams, and I've been waiting for international growth for years. Williams-Sonoma's forward P/E is only 15 right now, and the revenue increases that could come from expansion are massive. I'm definitely looking to add to my position.
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