While projected U.S. GDP growth has not changed materially, macro-housing data continues to improve. Private fixed-residential investment as a percentage of GDP has been growing for the past six consecutive quarters and it is now at 2.7%. Increasing household formation, price appreciation and higher housing turnover are all positive signs for home-improvement retailers, which are profiting from the better sales after years of pessimism.
However, credit availability remains tight and constrains the velocity of the recovery. In addition, considering how highly fragmented the industry is, companies will have to focus primarily on customer service, price, store location and assortment of merchandise.
Let’s analyze how three companies in the sector are doing.
Good performance and great outlook
The Home Depot, Inc. (NYSE:HD) is the world’s largest home-improvement specialty retailer. It operates 2,257 stores and employs more than 300,000 people.
The company reported sales of $19.1 billion for the first quarter, a 7.4% increase from the prior-year’s quarter. Seasonal time changes were beneficial, adding $574 million to sales. Net earnings were $1.2 million compared to $1 million a year ago. Due to this out-performance, management is revising upwards both sales and earnings guidance for the year.
The Home Depot, Inc. (NYSE:HD) is focusing on developing merchandising tools and increasing its investment in e-commerce. As part of its interconnected retail strategy, the company has completed the roll-out of its “buy online ship to store” initiative, giving customers access to more than 300,000 items available for pickup at the stores. The response from customers has exceeded management’s expectations; some 20% of customers who pick up an order at the store also buy additional items.
In addition, the company has been introducing significant changes to make its store operations simpler and more customer friendly. I believe these initiatives will drive more traffic and increase sales.
The Home Depot, Inc. (NYSE:HD) has a disciplined capital allocation strategy as well, as it utilizes excess cash to enhance shareholder returns via share buybacks and dividends paid. Through the company’s share-repurchase program, 27.2 million shares have been repurchased this quarter, totaling $2.1 billion.
Moderate quarter and large share repurchases for Lowe’s Companies, Inc. (NYSE:LOW)
Lowe’s Companies, Inc. (NYSE:LOW) is a the second-largest home-improvement retailer. It operates 1,755 stores in the U.S., Canada and Mexico.
The company’s first quarter was modest. Net earnings reached $540 million, growing 2.5% year-over-year. Overall performance in March was soft and improved in April and May. Indoor categories performed solidly while outdoor categories were negatively impacted by weather conditions, especially unseasonably cooler temperatures and greater-than-normal precipitation. However, management is optimistic and expects total sales to increase approximately 4% this fiscal year.
Lowe’s Companies, Inc. (NYSE:LOW) strategy is based on investing in stores to enhance the customer-shopping experience. The company is improving point-of-sale and directional signage while enhancing its array of products. Along with these initiatives, the company is improving merchandising and operational efficiency in order to generate long-term profits.
Lowe’s Companies, Inc. (NYSE:LOW) focus on everyday low prices, new lower price, go local and specialty sales initiatives has helped the company gain market share. It recently launched the online tool My Lowes, which is helping the company gain a competitive advantage, as well. Nonetheless, as positive as they are, all these initiatives require consistent spending and limits cash flow.
Additionally, and in order to captivate investors, Lowe’s Companies, Inc. (NYSE:LOW) is executing a strong share-repurchase program. Just this last quarter, the company repurchased $1 billion worth of stock and paid $178 million in dividends. Management approved a repurchase of up to $5 billion for this fiscal year. Plus, Lowe’s Companies, Inc. (NYSE:LOW) has raised its annual dividend every single year for the past 50 years. These payouts have almost doubled in the past five years. So, if you are looking for returns, this is your stock.
New business model and more stores coming up
Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS) sells home appliances, hardware, tools and lawn and garden equipment. It operates 1,238 stores.
Since its IPO in the second half of 2012, and in contrast to its under-performing parent company Sears Holdings Corp (NASDAQ:SHLD), the company’s business is poised to thrive and show healthier metrics in the future. The last quarter’s same-store sales decreased 0.5% year-over-year and, being lower than expected, caused the stock price to adjust heavily.
Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS)’s franchise-oriented business is attractive and proved successful thanks to its appeal of a neighborhood, independently owned business. In addition, the company’s supplier relationship with Sears Holdings Corp (NASDAQ:SHLD) allows it to return unsalable items at cost to its parent, almost eliminating inventory risk. This model helps the company’s finances, as it has lower occupancy costs and is less demanding in terms of cash flow.
The company continues to open new stores with this format while closing the old ones. However, despite these advantages, I must admit that I find trouble foreseeing an outstanding performance from Sears Hometown in the short term.
Bottom line
The Home Depot, Inc. (NYSE:HD) is a solid firm. Its consistent high performance delivered during these last quarters despite the market’s slow recovery give the company a great outlook for the rest of this fiscal year. I highly recommend buying this share.
I prefer to remain on the sidelines on Lowe’s Companies, Inc. (NYSE:LOW) as I believe that big investments in remodeling will damage the company’s profits if the market does not stabilize and inventory does not return to normal levels with a rebound in consumer spending.
Sears Hometown could be a long-term buying opportunity. But unless the company starts showing better figures this quarter and the market starts showing strong signs of recovery, I would stay away from this stock.
The article Betting on Home-Improvement Companies originally appeared on Fool.com.
Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe’s. Vanina is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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