The U.S. housing market has unquestionably had a weak start to the year, and there is no shortage of top-down analysis on where the market is headed. Analyzing the macro-economic climate is one thing, but investors can also get a good view from what Home Depot (HD 0.22%) and Lowe's Companies (LOW 0.43%) are saying.
What's going wrong?
Essentially, many are concerned a combination of rising mortgage rates and insufficient inventory are holding back housing turnover. Indeed, house price growth appears to have stalled since September 2013.
Source: S & P/Case Shiller
The question now is whether the housing market is going to stall, or if employment gains and an increase in credit availability (which would help counter any affordability issues) will push the housing market higher.
Evidence from Home Depot and Lowe's indicates that the underlying picture in the housing market is stronger than what the headline data suggested in the first quarter.
Why Home Depot and Lowe's remain bullish
In short, both companies reported slowing same-store sales growth in the first quarter.
Source: Home Depot and Lowe's Companies
It's easy to conclude that the market is slowing based on these two charts, but four takeaways from the results of Home Depot and Lowe's suggest otherwise.
First, weather had an obvious effect on sales and this could be seen in the variance of the regional performance in the companies' same-store sales. For example, Home Depot reported that its southern and western divisions "actually did better than expected" , as those regions posted comparable-sales growth that was twice the company's average. The weakness came from areas like New England and the Mid Atlantic -- areas heavily hit by poor weather. It was a similar story with Lowe's Companies, where comparable-sales growth was in the "mid-single digits" in the south and west -- significantly above its overall comparable-sales growth of just 0.9%.
Second, both companies reported relatively better sales from their professional customers. This is usually seen as a sign of cyclical strength. For example, Lowe's Companies saw its ProServices business generate sales which exceeded the company average. It was a similar story with Home Depot. Although its Pro sales grew at the company average, sales to its large Pro customers (those that spend more than $10,000 a year) grew at twice the company average.
Third, not only did weather have an effect on regional sales, it also affected the type of sales made in the quarter. For Home Depot, the categories that performed below the company average were things like flooring, indoor gardening, paint, outdoor gardening, and lumber. All of these activities are less attractive to do in cold weather. Similarly, Lowe's reported that its indoor products generated 2% comparable-sales growth in the quarter.
Fourth, both companies kept their full-year guidance constant. Lowe's expects comparable-sales growth of 4% in 2014, and Home Depot forecast a figure of 4.8%.
In a sense, investors might have been disappointed, because Home Depot has tended to raise its full-year guidance throughout the year as the housing market improves.
Source: Home Depot Presentations
On the other hand, Home Depot's monthly sales from February to April were 2.8%, 4.6%, and 2.8%, and CFO Carol Tome described May sales as "robust" on the associated conference call. Moreover, the timing of Easter affected the March and April numbers. As Tome outlined, "On a like-for-like basis, April comps would have been 200 basis points higher."
The bottom line
All told, Home Depot and Lowe's both saw their sales affected by the weather, but the strength in less weather-affected regions and categories indicates underlying home improvement spending is just fine. Moreover, the linear pick-up in sales suggests that growth is coming for the sector, and the strength of spending by professional customers also demonstrates good ongoing demand. The view from a bottom-up analysis of Home Depot and Lowe's Companies is that housing remains in growth mode.
