Lowe’s to Home Depot sales gains depend on housing recovery

Tina Bailey is spending $20,000 to create a master suite and may buy the bathroom fixtures from Home Depot Inc. or Lowe’s Cos.

“It’s going to increase the value of my home,” Bailey, 48, said of the improvements she’s making to the Greensboro, North Carolina, house she bought in June for $178,000.

Buoyed by a recovering housing market, U.S. homeowners are opening their wallets for renovations. Home Depot and Lowe’s this week both reported earnings that beat analysts’ estimates and raised their profit forecasts for 2013. Yesterday, Lowe’s said profit for the year ending Jan. 31 will be about $2.10 a share, up a nickel from its previous projection.

Rising home prices are boosting demand for appliances and other big-ticket items that consumers were reluctant to buy in the housing downturn, Lowe’s Chief Executive Officer Robert Niblock told analysts yesterday. The challenge will be to keep luring big-spenders like Bailey next year, when some analysts predict rising interest rates will put pressure on housing sales, which in turn could damp demand for such high-margin items as fridges, jacuzzi tubs and granite counters.

“For the next couple of quarters, there is good momentum and visibility because of existing home sales, but mortgage refinancing is slowing down,” said David Schick, an analyst at Stifel Financial Corp. in Baltimore who earlier this year downgraded Home Depot and Lowe’s to hold from buy. “Next there may be a little bit of deceleration” in housing activity.

Two-Year High

The average rate on a 30-year fixed loan rose to 4.68% in the week ending Aug. 16, matching a two-year high reached in early July, from 4.56% the week prior, the Mortgage Bankers Association in Washington said yesterday.

Bigger increases in rates will “reduce the pool of eligible homebuyers,” Lawrence Yun, chief economist of the National Association of Realtors, said yesterday.

As long as interest rates don’t exceed 6% on 30-year mortgages, Lowe’s isn’t “overly concerned,” Niblock told analysts yesterday.

“The rate increases will likely take some steam out of the recent housing market rebound, but shouldn’t derail it as long as job gains persist, homes continue to appreciate and rates rise more gradually going forward,” he said.

In the quarter ended Aug. 4, Home Depot’s net income rose 17% to $1.8 billion, or $1.24 a share, from $1.53 billion, or $1.01. Analysts projected $1.21 on average. Lowe’s net income increased 26% to $941 million, or 88 cents a share, from $747 million, or 64 cents, a year earlier. Analysts projected 79 cents.

Paint Sales

Three years ago, Home Depot and Lowe’s were selling a lot of paint and carpet to shoppers who couldn’t afford to move and wanted to at least fix up their existing residences.

Now rising home prices are “giving homeowners renewed confidence and willingness to spend on home-improvement projects that may have been delayed during the downturn,” Niblock said in a telephone interview.

Last month, as buyers rushed to lock in rates before they increased further, sales of previously owned homes surged to the second-highest level in more than six years, according to figures from the NAR. The buying frenzy has rippled through the construction industry, which in turn has boosted sales at the home-improvement chains.

Yesterday, Thomas Rule, an architect and contractor, waited in line at a Home Depot in the Hollywood neighborhood of Los Angeles to buy board for a bathroom renovation at a historic hillside home. Business began picking up four or five months ago and Rule now has four construction jobs underway.

Day Workers

“I need more people and more hours in the day,” Rule said. He employs five people full-time and hires extra day workers when needed.

Growth of home improvement spending “should begin to moderate as we move into 2014,” Kermit Baker, director of the remodeling futures program at Harvard University’s Joint Center for Housing Studies, said last month.

Home Depot is poised for slower growth this year than in 2012, according to analysts surveyed by Bloomberg. The retailer may increase revenue 4.8% in 2013 compared to an increase of 6.2% a year earlier. Analysts project that Lowe’s revenue will rise 4.3% this year, up from less than 1% in 2012, when the company was struggling to upgrade its stores and technology.

Home Depot rose 0.4% to $74 at the close in New York. Lowe’s climbed 3.4% to $47.39.

Home Depot shares have slipped 2.6% since May 10, the end of the week that mortgage rates began rising. Lowe’s has advanced 13% since then, more than half of that since yesterday after it reported earnings. The Standard & Poor’s 500 Index has risen 1.4% in the same period.

Chris Bertelsen, who oversees $2.1 billion as chief investment officer at Global Financial Private Capital, said his Sarasota, Florida-based firm sold its Lowe’s shares earlier this month and doesn’t own Home Depot.

“Even though I don’t think the recovery in housing is over, I think the fat part of the recovery is probably behind us,” he said in a telephone interview. “The increase in mortgage rates has rattled these stocks.”

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