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On The Fly: What to watch in Home Depot, Lowe's earnings reports.

Home improvement retailers Home Depot (HD) and Lowe's (LOW) are scheduled to report results of their first quarters before the market open on Tuesday, May 15, and Wednesday, May 23, respectively. Home Depot's conference call is scheduled for 9:00 am EDT on Tuesday and Lowe's will hold its quarterly call on May 23 at 9:00 am EDT. What to watch for: 1. HOUSING MARKET, HOME IMPROVEMENT COMMENTARY: On April 16, the National Association of Home Builders said builder confidence fell one point to a level of 69 in April, but "remains on firm ground." "Strong demand for housing is keeping builders optimistic about future market conditions," said NAHB Chairman Randy Noel, adding that "However, builders are facing supply-side constraints, such as a lack of buildable lots and increasing construction material costs. Tariffs placed on Canadian lumber and other imported products are pushing up prices and hurting housing affordability." In April, Wells Fargo analyst Zachary Fadem said home improvement is particularly attractive in retail given the valuations in housing and demographics tailwinds. He said that the home improvement category has seen the most consistent growth in "consumer share of wallet" to 7.5% over the past 5 years, even though that level is still below 8.7% prior peak in 2005. 2. COMPETITION WITH ONLINE RETAILERS: Analysts and investors will listen for comments on how the home improvement retailers view competition with online retailers like Amazon (AMZN). Home Depot is planning to add over 1,000 new hires to its technology teams this year in an effort to support an $11B multi-year investment plan to expand its lead in brick-and-mortar retail over rivals like Lowe's and fight increased competition from online players like Amazon, Recode said. 3. GUIDANCE: Home Depot's Q4 adjusted EPS and sales beat the Street's expectations and it reaffirmed its sales outlook for 2020 of $115B-$120B. For FY18, the company sees EPS up 28% to $9.31, revenue up 6.5% and SSS up approximately 5%. Lowe's Q4 sales beat consensus estimates but its weak margins caused earnings to miss consensus. Looking ahead, Lowe's sees FY18 EPS of $5.40-$5.50 on total sales up approximately 4% and SSS up about 3.5%. At the time, CEO Robert Niblock said Lowe's was "working diligently to improve execution with a focus on conversion, gross margin, and inventory management," adding that "Given the rapidly evolving competitive landscape, we are also accelerating our strategic investments leveraging the benefits of tax reform. We continue to build the capabilities required to deliver simple and seamless experiences and strengthen our position as the omnichannel project authority." In April, Stifel analyst John Baugh lowered his Q1 same-store sales growth estimates for Home Depot to 6.0% from 6.5% and for Lowe's to 4.0% from 4.7%, citing "a number of conspiring factors," including sluggish consumer spending data and bad weather. While acknowledging the opportunity for better results in April, Baugh said he would rather be somewhat conservative at this point. Cleveland Research recently said its Home Depot 2018 comp estimate of 6%, versus guidance of 5%, looks reasonable given solid underlying demand, share gains, and incremental inflation. The firm said Lowe's comp gap versus Home Depot could widen further given continued disruptions and inefficiencies in execution. 4. SUCCESSION PLANS: In March, Lowe's announced that Chairman, CEO and President Robert Niblock will retire from the home improvement retailer as soon as the company is able to secure a successor. The board of directors has initiated a search for his successor, and in the interim Niblock will remain in his current role as chairman, president and CEO. Niblock has been with Lowe's for 25 years, including 13 years as chairman and CEO, and said in a statement that "I am confident that it is the right time to transition the company to its next generation of leadership." In January, Lowe's appointed two independent directors to its board and announced plans to nominate a third following talks with activist investor D.E. Shaw. The activist believes the shares could triple if the company can better compete with Home Depot.
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Publication:The Fly
Date:May 14, 2018
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