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Why Home Improvement Retailers Continue to Struggle in 2016

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Home improvement companies

Now that most 3Q16 earnings have been released, it’s time to analyze and compare home improvement retailers’ performances. In this series, we’ll focus on the 3Q16 performances of Home Depot (HD) and Lowe’s (LOW).

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Home Depot

Founded in 1978, HD is the largest home improvement retailer in the world with 2,276 stores spread across the US, Canada, and Mexico. The company has a market capitalization of $158 billion.

Lowe’s

Founded in 1946, Lowe’s, the second-largest home improvement retailer in the world, went public in 1961. The company has 2,119 stores located in the US, Canada, and Mexico. LOW has a market capitalization of $64 billion.

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Stock performance

Home Depot posted adjusted EPS (earnings per share) of $1.60 on revenue of $23.2 billion against analysts’ estimates of $1.58 on revenue of $23.1 billion. Also, after the strong 3Q16 performance, the company management raised its earnings estimate for 2016 to $6.33 from its earlier guidance of $6.31. This along with the news of a 1.5% rise in US home prices in 3Q16 increased investors’ confidence, leading to a rise in Home Depot’s share price. As of December 5, 2016, Home Depot was trading at $129.7, which represents a growth of 1.6% since the announcement of its 3Q16 earnings on November 15, 2016. However, year-to-date, the company’s share price has fallen 1.1%.

Lowe’s (LOW) posted adjusted EPS of $0.88 on revenue of $15.7 billion against analysts’ estimate of $0.96 in EPS on revenue of $15.9 billion. Despite the lower-than-expected figure, the rise in home prices appears to have increased investors’ confidence, leading to a rise in its share price. As of December 5, 2016, Lowe’s Companies was trading at $72.3, which represents a growth of 5.2% since the announcement of 3Q16 earnings on November 16, 2016. However, year-to-date, the company’s share price has fallen 3.5%.

Comparatively, since the beginning of 2016, Williams-Sonoma (WSM) and Bed Bath & Beyond (BBBY) have returned -4.1% and -5.3%, respectively. The SPDR S&P Homebuilders ETF (XHB), the broader comparative index, has returned 1.5%. XHB invests more than 19% of its holdings in home improvement retailers.

Series overview

In this series, we’ll look at the 3Q16 performance of Home Depot and Lowe’s on key metrics and analyst estimates for the next four quarters. Finally, we’ll wrap up this series by comparing valuation multiples and the expected stock price over the next 12 months for both the companies.

First, let’s start by discussing revenue growth for 3Q16.

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