Yesterday, Home Depot (NYSE:HD) basically said the worst of the housing debacle is over. Is this a real, live "green shoot" that so many investors are digging desperately for, or just one more example of wishful thinking?
In keeping with the "worst is over" theme, Home Depot said it believes it could produce flat to negative 7% earnings this year instead of the negative 7% decrease it had predicted in its February guidance. The company is improving operating efficiencies in order to bolster margins and is working on customer-oriented initiatives such as providing bilingual staff and better service, as it continues to battle against hardware rival Lowe's (NYSE:LOW). Bear in mind, though, Home Depot still expects a 9% drop in annual sales.
The bursting of the housing bubble is one of the major challenges Home Depot faces. Many retailers are suffering because consumers have a myriad financial problems, including plunging home prices, resetting option-ARM mortgages, unemployment, and sheer over-indebtedness from liberal use of plastic bearing the logos of Visa (NYSE:V) or MasterCard (NYSE:MC).
And of course, the housing debacle directly impacts Home Depot's business, just as the boom benefited it when people upgraded their homes to sell for big bucks. The fact that Costco (NASDAQ:COST) recently ditched its home concept probably tells us a lot about how badly this segment of retail has tanked, too.
Home Depot can say that it believes the worst is over, but the fact that management pointed to certain "economic indicators" as proof should certainly make you wonder if it’s simply drinking the same Kool-Aid as the folks who keep pointing to the flimsy, maybe even imaginary, "green shoots."
Plenty of people believe the worst is not over for the housing market or for the economy in general, and that this is just the eye of the storm. After all, increasing unemployment means more foreclosures, even among those who were previously considered "prime" credit risks. Some reports suggest that more than one million option ARM mortgages are expected to reset higher in the next four years. And of course, there's still a major glut of housing inventory out there to begin with.
Recent data out of the retail space in general also implies that consumers aren't exactly feeling flush, and even when things do get better, consumer mindsets may be a heck of a lot more prudent than they were during the bubble. While discount retailers such as Wal-Mart Stores (NYSE:WMT) have managed to survive and even thrive in this climate, the chic-er Target (NYSE:TGT) has been less adaptable.
Take Home Depot's tidings as you wish; I know some people believe recovery's just around the corner. However, when it comes to retail, Home Depot and its rival Lowe's aren't stocks I’m interested in checking out right now; the continued challenges to their market are too great.
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