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Home Improvement on Hold for Now

Monday, 18 Apr 2011 01:25 PM

If only the Great Recession were a distant memory, consumers were out spending again, and the economy was happily on the road to everlasting recovery.

If only. Yes, the recession is officially over, and yes, consumers are spending again, but the economy is far from rebounding and people are spending more and more at the gasoline pump — $100 billion extra on gasoline, by one estimate.

Retail sales rose 0.4 percent in March from February, slightly below private economists’ expectations, according to the Commerce Department.

"Many American families and businesses are now facing an additional burden because of rising gas prices," says U.S. Commerce Secretary Gary Locke. "This underlines our vulnerability to fluctuating oil markets and the need to improve domestic energy production and transition to a clean-energy economy."

For big-box home-improvement retailers like the Home Depot (HD) and Lowe's (LOW), things could be better.

Take the Home Depot. The company reported strong March sales, rising 2.2 percent on top of a gain of 0.8 percent in February and up 5 percent from March 2010. With housing starts and new-home sales in the dumpster, demand is not coming from small homebuilders. More likely, people are fixing up the houses they are living in and where they plan to stay.

Nevertheless, Zacks Investment Research is sticking with a neutral outlook for Home Depot.

"Heavy job losses and reduced access to credit have led to a sharp fall in consumer discretionary spending on big-ticket items. Although the economy is showing signs of revival, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer spending rebounds," say Zacks analysts.

Lowe's is on neutral also. Lowe's expects fiscal 2011 earnings between $1.60 and $1.72 per share, with sales growth forecast between 2 percent and 5 percent, well above comparable store sales between 1 percent and 2 percent for the year.

The company deserves credit for deciding a few years ago to cut back on store openings, which has been good for its finances. Lowe's is also going to focus on selling more private-label brands in order to boost profit margins.

"As a result, the company expects to generate substantial future cash flows. The company’s strong liquidity will position it to drive future growth," Zacks says.

But, like the Home Depot, Lowe's is just as sensitive to the economy.

While weak recovery and pricey gasoline are forcing many to put their remodeling projects on hold, the summer is arriving, a time when most remodeling takes place, so expect to see a blip in sales, reports an online equity research service StockCall.com.

"Winter is over and companies in the industry such as The Home Depot Inc. and Lowe's Companies Inc. are approaching their busiest season. As the weather heats up and people prepare their gardens for spring and summer, stores are hosting promotions on related products," its analysts said in a statement.

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