The usual wisdom when home sales are soft is that people are not trading up but staying in the current homes and making improvements, such as remodeling a kitchen or bathroom or adding on. In such times, home improvement stores like Lowe’s Companies (NYSE: LOW) and The Home Depot, Inc. (NYSE: HD) typically enjoy a boost.
Existing home sales have been wobbly, and now that the federal tax credit has expired, sales are expected to wobble down even more. Lowe’s reported earnings above estimates this morning, but offered an outlook for the next quarter that was lower than analysts’ expectations.
The company posted EPS of 34 cents, up from 31 cents in the first quarter of 2009, and above expectations of 32 cents. Revenues totaled $12.4 billion, up from $11.8 billion a year ago, and again higher than estimates of $12.24 billion.
In its outlook for the second quarter, however, Lowe’s predicted EPS of 57 cents to 59 cents, lower than analysts’ consensus estimates of 62 cents. The company also forecast full-year EPS of $1.37-$1.47 compared with estimates of $1.45.
The first quarter, which ended April 30, showed gains in garden items and appliances, the latter due mostly to federal incentives. Going forward, though, the company is wary of consumers once again keeping their wallets closed as uncertainty about the economic recovery continues.
Part of that wariness could be due to the growing number of what Morgan Stanley analysts are calling “strategic defaults” on home mortgages that are underwater. A MarketWatch story notes that when negative equity in a house rises to about 25%, homeowners begin to behave like investors who begin to cut their losses in an effort to return to a positive cash-flow position. These homeowners continue to pay other bills, but just walk away from their mortgages.
This type of default is also likely to increase as the housing market stabilizes. As that happens, the future becomes clearer and many homeowners will see that getting back to even on their mortgages will take 7-10 years, and they’ll simply stop paying.
For the home improvement stores, these homeowners will no longer be looking to upgrade their homes; they’ll be renting. And that’s not good for Lowe’s or Home Depot.
Lowe’s shares are down more than 5% in early trading today. Home Depot, which reports first quarter earnings tomorrow, is seeing its shares falling by about 3% so far. Lowe’s shares have already traded more than half their average daily volume, as investors once again show homeowners how to respond to declining asset values.
Stay tuned this week. We have Home Depot tomorrow, as well as Wal-Mart Stores (NYSE: WMT) and Target (NYSE: TGT) on deck this week. We’ll be comparing and contrasting these in-depth after earnings.
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