Recent quarterly earnings from several big-box retailers seem to confirm that spending money is no longer the national pastime. That may be good news for baseball, but it's bound to spook anyone worried about the health of the consumer sector of our economy.
No house party here
Both Lowe's rival Home Depot
Home Depot's second-quarter net income fell 8% to $1.1 billion, or $0.66 per share. Sales fell 9.1% to $19.1 billion, and same-store sales plunged 8.5%.
Target's second-quarter net income likewise decreased 6.4% to $594 million, or $0.79 per share. Sales dipped 2.7%, to $14.6 billion, and same-store sales fell 6.2%.
Of the three, only Home Depot raised guidance for the year -- and just marginally. These companies' outperformance on the bottom line isn't due to returning shoppers bolstering the top line; instead, it stems from cost-cutting.
Shrinking forces at big boxes
There are pockets of unique retail strength even in discretionary companies, such as the ongoing top- and bottom-line successes of Buckle
In the past, Lowe's, Home Depot, and Target clearly benefited from the housing bubble, as owners renovated and decorated their homes. Today, the housing market can't help any of them. Target, at least, sells more than decorations and home improvement items. In an apparent effort to keep up with customers' shifting spending trends, it's also supplementing its traditionally discretionary offerings with key staples such as foodstuffs.
I'm not big on snapping up shares in Lowe's or Home Depot right now. I'd need a better sense that consumer spending and the housing market are truly healing. I favor Target a bit more than either of those two stocks, but not by much. If I had to buy a big-box retailer, Wal-Mart's the better deal, especially when consumers are hot for bargains. Target's trading at about 16 times earnings, versus Wal-Mart's 15.
Companies can only cut costs for so long. Until flagging sales begin to revive, investors should shop for retail stocks very carefully.
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