Home Retailers Still Haunted by Risk

Home-improvement retailers delivered a mixed bag of data in their most recent quarterly results. Although some of the information seems heartening, a rebound for all retailers remains no sure thing.

Home Depot (NYSE:HD) beat analysts' expectations with its most recent quarterly results. Fourth-quarter net income came in at $342 million, or $0.20 per share, compared with a net loss of $54 million, or $0.03 per share, this time last year.

However, Home Depot's net sales decreased 0.3%, to $14.6 billion, and U.S. comps fell 1.1% in a weak domestic market. In perhaps the report's most positive sign, total same-store sales did increase by 1.2%.

Yesterday, archrival Lowe's (NYSE:LOW) reported that fourth-quarter net income surged 26.5%, to $205 million, or $0.14 per share. Sales increased 1.8%, to $10.2 billion, but comps fell 1.6%.

Both retailers' earnings suggest that the worst of the economic crisis is behind us and that consumers are tentatively venturing back to do-it-yourself home improvements. Home Depot bumped up its dividend by 5%, while Lowe's authorized the repurchase of as much as $5 billion in shares.

That's all seemingly good news -- but today's reported plunge in February's consumer confidence suggests grimmer possibilities lurking underneath. Continued high unemployment and an inventory-bloated housing market could join forces to huff and puff and blow home-improvement retailers' future earnings down.

Just last week, even the mighty Wal-Mart (NYSE:WMT) seemed to be hitting a wall, after a fairly lackluster quarter of weaker domestic sales. I'd still consider Wal-Mart a better defensive retail stock than either Home Depot or Lowe's, both of which probably won't soon regain the type of growth they enjoyed during the housing bubble. If the economy gets worse, consumers will cut discretionary purchases first, meaning shares in companies such as lululemon athletica (NASDAQ:LULU) and Talbot's (NYSE:TLB) could quickly tumble.

Sure, folks will always want to occasionally upgrade their surroundings, but the days of mass adoption of gratuitous granite countertops and Berber carpets are probably behind us. Costco's (NASDAQ:COST) decision last year to abandon test ventures into the home-improvement niche was a telling move.

To size up these retail rivals, Wal-Mart's trading at 13 times forward earnings. Lowe's has a forward price-to-earnings ratio of 14, and Home Depot looks the priciest at 18. Those prices seem just too steep, given the challenges facing a sustainable turnaround in the home-improvement niche. Investors should think twice before buying these stocks now.