The housing market recovery has been good for home improvement retailers and the home goods sector as well.
As has previously been reported, the housing market is in the early stages of a shaky recovery. Inventories remain tight even though rising interest rates may have recently caused a pullback in homebuilders’ share prices. Interest rates have climbed by 100 basis points in the past month or so. In other words, the housing market recovery is going about as well as Derek Jeter’s recovery from a broken ankle – both have yet to get their sea legs back, so to speak.
Home Improvement Retailers’ Performance
The Home Depot, Inc. (NYSE:HD) has long been a strong performer with a good track record of earnings per share growth. This is due in large part to consistent revenue growth. In the past year or so, the share price has risen by about 40%. That said, the retailer’s stock price is hovering at about $80 per share – a bit off the 52 week high. Also, the company’s price/earnings ratio is 25.24, and this exceeds the S&P’s P/E ratio of 17.7. So some profit taking could be in order, as a more solid housing recovery in the coming year will be needed to take the share price higher.
The Home Depot, Inc. (NYSE:HD)’s lead competitor is Lowe’s Companies, Inc. (NYSE:LOW). Some observer’s claim the company hopes to rebrand itself by putting some distance between the two outfits with a new advertising campaign. Lowe’s Companies, Inc. (NYSE:LOW) hopes to convince customers to tackle more home improvement projects while closing underperforming stores. The retailer is also looking to boost its online sales as it makes a push into the California market by way of the recent acquisition of Orchard Supply.
Like its competitor, Lowe’s Companies, Inc. (NYSE:LOW) is trading at a premium at about $45 per share, along with a price/earnings ratio of 25.97. In short, investors should consider alternatives like the home goods sector.
The Home Goods Sector at a Glance
The home goods sector includes outfits that manufacture and distribute home furniture, household accessories, so-called “soft furnishings” (draperies and curtains), appliances, cookware and the like.
A recovery in the housing market has helped this sector recover from the Great Recession of 2008 as consumers reined in non-essential spending and held off home improvement projects due to lower disposable income. Obviously, home ownership and improvements are key drivers of the home goods sector.
One of the lead retailers here is Bed Bath & Beyond Inc. (NASDAQ:BBBY). The home goods store operates more than 1,000 outlets including other shops like Buy Buy Baby, Harmon Face Value and Christmas Tree Shops. The outfits court consumers in search of products like small kitchen appliances, pots, pans, and sundry items for the bedroom like sheets.
In 2013, the share price has climbed more than 35%. This is due in part to 3.4% growth in same store sales and overall sales growth of 18% year-over-year. And the outfit anticipates sales to rise by about 7% in 2014.
Shares are presently trading at about $78, and its price/earnings ratio is currently 16.91. This figure along with the expected sales numbers for 2014 may make Bed Bath and Beyond a better buying opportunity than the home improvement shops mentioned here.
The Bottom Line
While the housing market has yet to fully recover, the pullback during the summer may be a temporary breather. Interest rates could go higher, but a lot depends on if and when the Federal Reserve’s easy money policy will be tapered.
In the final analysis, the next stage of the housing recovery will be a boon to the home improvement retailers. In the meantime, investors might find better opportunities in the home goods sector as shoppers are lured by Bed Bath and Beyond’s 20% off coupons readily available with the Sunday papers.
Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond, Home Depot, and Lowe’s.
The article Look Beyond Home Improvement Retailers originally appeared on Fool.com and is written by Kyle Colona.
Kyle 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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