Home Depot, Lowe´s and Lumber Liquidators Continue Building Profits

Home improvement retailers like Home Depot (NYSE: HD  ) , Lowe´s (NYSE: LOW  ) and Lumber Liquidators (NYSE: LL  )  are reaping the benefits from the estate recovery and reporting rock-solid financial performance for investors. Even if valuations are getting stretched, these companies are firing on all cylinders and their recent highs might be justified.

 Home Depot: the heavyweight champion
With more than 2,200 retail stores in the U.S., Canada and Mexico, Home Depot is the largest home improvement retailer in the world. Scale advantages, geographical presence and brand recognition differentiate this undisputed heavyweight champion from its smaller competitors.

Home Depot has been an unequivocal beneficiary from the real estate recovery over the last years, and management has implemented a series of initiatives to increase efficiency and streamline operations. Home Depot sold its professional supply business in 2007 and closed its ancillary retail operations in early 2009, the company pulled away from China in 2012 so management is now free to focus on its key orange box stores.

The company is doing remarkably well lately, and there is no slowdown in sight as of the last quarter. Home Depot reported sales of nearly $19.5 billion during the quarter, a 7.4% increase from the third quarter of 2012. Comparable store sales rose by a healthy 7.4% and the U.S. business was even stronger with an annual increase of 8.2% in comparables during the period.

On an adjusted basis, Home Depot reported a whopping increase of 28.4% in earnings per share versus the year-ago period. The outlook got stronger too, management raised guidance for the full year and it now expects a 24% increase in earnings per share for fiscal 2013 fueled by a 7% rise in comparable sales for the period.

Home Depot is trading at a current P/E ratio of 23.7, a demanding valuation for a retailer, but not too excessive if the company manages to sustain these kinds of growth rates in the coming years.

Lowe´s: the challenger
Lowe´s operates more than 1,800 stores in the U.S., Canada and Mexico; this makes it Home Depot´s biggest competitor and the second largest home improvement retailer in the planet. Like Home Depot, Lowe´s benefits from its scale and purchasing power, and the company has always relied on its proprietary automated distribution network to maintain a remarkable level of operational efficiency.

Another similarity between Lowe´s and Home Depot is that both companies continued performing strongly during the last quarter. Lowe´s delivered a 7.3% annual increase in sales on the back of a 6.2% rise in comparable store sales during the quarter. Earnings per diluted share jumped by 34.4% to $0.47 per share. This was a tad below analysts' expectations but still amounts to a very strong performance for such a big retailer.

Management also raised its forecast for the rest of the year, saying that revenues are expected to increase by 6% fueled by a 5% rise in comparable store sales, and earnings per share are forecasted to grow by 23.8% to $2.15 per share in fiscal 2013 versus $2.1 per share in fiscal 2012.

CEO Robert A. Niblock has an optimistic vision for the industry in the coming quarters: "The home improvement industry is poised for persisting growth in the fourth quarter and further acceleration in 2014". Niblock said in the press release.

Lowe´s trades at a P/E ratio near 25.5, in line with Home Depot and reflecting strong growth expectations for the company in the medium term.

Lumber Liquidators: the runner-up
Operating nearly 305 stores, Lumber liquidators is much smaller than Home Depot and Lowe´s, but the company enjoys a leadership position in its core business of hardwood flooring in which Lumber Liquidators is the largest player in North America.

This smaller size means that Lumber Liquidators doesn´t enjoy the same kind of scale as Home Depot or Lowe´s, but it also allows for superior growth potential. The company has increased sales at a compounded 14.9% annually over the last five years and earnings per share have expanded at an amazing 28.5% annually over that period.

The last quarter brought even more good news for investors in Lumber Liquidators; the company delivered a remarkable increase of 24.5% in revenue powered by a whopping jump of 17.4% in same store sales. Net income exploded by 58.4% to $20.4 million during the quarter, or $0.73 per diluted share.

The company also lifted its earnings per share guidance for 2013 to between $2.65 and $2.74 from a previous guidance of $2.45 to $2.60. Management expects comparable store sales to increase in the range of 14% to 15% during the year and the company is planning to open 10 to 12 new locations in the fourth quarter for a total of between 29 to 31 new store locations in 2013. This kind of growth rarely comes for a cheap valuation though; investors need to pay a P/E ratio of 45.3 for a share of this explosive specialty retailer.

Bottom line
Home Depot, Lowe´s and Lumber Liquidators are priced for growth, and so far all three companies are delivering the kind of performance expected of companies with their respective valuations. As long as the real estate recovery continues providing strong tailwinds and they keep capitalizing on the opportunity, these home improvement retailers are building on sound foundations.

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