Despite a slowdown in the US housing market, the expectation is that home- improvement stores will still perform well. To a large extent, this is the case. While the harsh winter weather obviously put a drag on sales, as blizzards and snowfall are not the most inviting circumstances to fix your roof or repaint your house, Lowe's (LOW 1.81%) and Home Depot (HD 2.55%) held up well during the period. As pent-up demand is unleashed during the spring, the competing chains are expecting things to improve over the next few months.
Earnings misses but still growing
While more or less every major retailer has blamed underwhelming results on the weather, the excuse seems somewhat more legitimate for home-improvement chains. It's simply very difficult to work on your home with several feet of snow on it. Still, both chains managed to grow earnings quite impressively during the period, despite missing on earnings and revenue.
Let's take a look at some of the numbers from the respective reports. Home Depot, America's largest home-improvement chain, earned $1 per diluted share in the first quarter, up from $0.83 a year ago, as net income rose 12%. Comp-store sales looked encouraging as well, rising 2.6%, while overall sales rose 2.9% to approximately $19.7 billion. According to management, it's difficult to quantify the impact of the weather on sales, but the company estimates that it shaved roughly 100 basis points off comp-store sales.
Lowe's, Home Depot's smaller competitor, also did well in terms of earnings. Adjusted earnings per share of $0.62 rose 26.5% year over year on a 2.4% increase in overall sales. A lower tax rate boosted EPS by about $0.04. Comp- store sales weren't quite as impressive, up 0.9%. While the company naturally sold fewer outdoor products such as gardening tools for the period, demand was still solid for indoor goods including plumbing parts and indoor paints.
Pent-up demand
Things are actually looking pretty good for these two big-box retailers as we enter the spring season. Despite a very rough winter, both managed to grow earnings quite impressively during the period, which is evidence of their strong execution. Moreover, better weather is unleashing pent-up demand for home-improvement supplies for projects that people were unable to take on during the winter.
Generally, spring is the most important season for these chains as consumers make use of the better weather to work on their homes and gardens. According to analysts, spring season sales were delayed rather than eliminated due to the weather, the results of which should be visible in the next quarterly report.
What could also provide a boost to home-improvement chain earnings next quarter is damage to infrastructure due to the frequent storms, which is at some point going to have to be repaired. Going forward, Lowe's is still expecting revenue to grow by 4.8% this year, while Home Depot is holding on to its target of 5% revenue growth. According to Lowe's CEO, May sales have been strong so far, which has allowed the company to maintain its forecast despite uninspiring comp-store sales growth in the first quarter.
The bottom line
Despite severe winter weather that took its toll on the retail sector at large, home- improvement store chains Lowe's and Home Depot actually managed to hold up very well during the period. Both saw earnings grow by double-digit percentages, which is a strong performance by any measure. Moreover, as the weather improves, pent-up demand for home-improvement supplies and repairs to infrastructural damage caused over the winter should boost sales for the industry.
