U.S. home improvement chains Home Depot and Lowe's Cos must find a quick fix for their sagging sales to retain investor confidence in 2010.
Rising lumber prices, cost cuts and demand for shovels in the snowy weather should help the retailers meet fourth-quarter profit estimates next week, but that might not be enough to cheer investors who want to see sales at stores rise again.
We are not overly bullish nor are we particularly bearish. We are coming off the worst downturn in the housing industry's history and we are likely to have a slow recovery, Cowen & Co analyst Laura Champine said.
She expects same-store sales at both chains to turn positive only in the second quarter of the current year.
Home Depot and its smaller rival have grappled with lackluster sales as customers put off major home renovations.
I think you may see an increased number of small projects, but the big-ticket projects are probably still down ... The question is how many people were going to replace the whole bathroom and now they say 'I will just buy a new faucet,' Champine said.
The U.S. Commerce Department said earlier this week the pace of housing starts rose to a six-month high in January, suggesting that the battered housing sector was beginning to stabilize.
A survey of about 600 families across the United States by analyst David Schick at Stifel Nicolaus showed better home improvement buying plans in December and January.
Lowe's is due to report on Monday and Home Depot on Tuesday.
HOME DEPOT SEEN PERFORMING BETTER
While any revival in the housing market bodes well for both companies, many expect Home Depot to outdo Lowe's in the fourth quarter due to easier same-store sales comparisons.
The No. 1 chain will also benefit from a slower expansion strategy, recent initiatives to improve its supply chain and draconian cost-cutting measures including a recent round of job cuts.
Previously, Lowe's was doing better operationally and eating Home Depot's lunch ... doing Home Depot better than Home Depot was doing it, said Thomas Villalta, portfolio manager at the Jones Villalta Opportunity Fund in Austin, Texas, which owns Home Depot shares.
But now Home Depot is a lot more geared to outperform over the long term due to their turnaround, said Villalta.
Under Chief Executive Frank Blake, Home Depot has been closing secondary store chains and upgrading service and products in its core retail business to win back market share from Lowe's. Blake is credited with returning Home Depot's focus to being a regular big-box strip-mall type store.
Early evidence of this came last August, when Home Depot beat Lowe's on the same-store sales front for the first time since the fourth quarter of 2003.
Villalta sees Home Depot beating estimates by 1 or 2 cents a share in the latest quarter, but its same-store sales turning positive only in the fourth quarter of the current year.
Analysts on average were expecting Home Depot to earn 16 cents a share, according to Thomson Reuters I/B/E/S.
Oppenheimer's Brian Nagel said he did not expect anything spectacular in the fourth-quarter report card and added the companies will most likely issue cautious outlook.
It's really all about sales at this point, he said.
He said the stocks were undervalued at this point as the improvement in housing markets will stick. Nagel has an outperform on both stocks.
Home Depot's stock trades at about 18 times forward earnings, while Lowe's trades at a multiple of about 17.
Cowen's Champine, who has a neutral on both stocks, said both were fairly valued at current levels.
I don't really think these are growth companies ... We are on the brink of a recovery, but that's not an original thought. The market is also anticipating that, Champine said.
(Editing by Steve Orlofsky)