Things are tough all over for the U.S. home-improvement retail sector.
Intimately linked to the housing market (which has been mired in a deep crisis for at least the past three years), some home-improvement stores are suffering a sharp decline in sales.
Jason Lilly, senior portfolio manager at Rockland Trust, in Rockland, Mass., told International Business Times that the home-improvement sector has been victimized by a confluence of negative factors.
“The overhang of a weak housing market, stubbornly high unemployment and consumers saddled with debt – it’s not a good environment for the sector,” he said.
In response to this ongoing malaise, Lowe's Cos. Inc. (NYSE: LOW) recently announced that it will close twenty under-performing stores, resulting in nearly 2,000 job losses. Lowe’s also said it will significantly scale back its original plans to open new stores, suggesting the company had aggressively over-expanded during a period of economic fragility, amidst the drying up of home equity loans.
Indeed, millions of homeowners are trapped in properties with underwater mortgages, with no intention (or incentive) on the horizon to make home improvements.
Some analysts cheered Lowe’s decision as painful but necessary.
Gary Balter, an analyst at Credit Suisse, wrote in a research note: “We view these changes as positives for [Lowe’s] as they are reflective of a broader organizational and strategic transformation.”
Jeff Duncan, president of Duncan Financial Management in St. Louis, Mo., told IB Times that Lowe’s essentially was hit by bad timing and poor locations of its stores – he noted that many of the locales the company now plans to close were situated too close to sites owned by its principal rival Home Depot (NYSE: HD).
The U.S. home improvement business is basically a duopoly – the only players of any account are Lowe’s and its larger rival Home Depot.
There’s really no one else.
However, most analysts agree that Home Depot was better prepared for the housing market collapse and that it has “out-executed” Lowe’s, by, among other things, improving their operations and restructuring management several years ago.
“Home Depot simplified their operations, focused more on customer service, improving the ‘retail experience’ for consumers,” Lilly said.
Lowe’s has made some similar steps – like streamlining management and upgrading customer service, but perhaps took too long to make these changes.
In any case, like Lowe’s, Home Depot stock has similarly suffered – despite outperforming Lowe’s. Indeed, in the second quarter, Home Depot posted earnings above expectations, boosted by strong same-store sales growth.
While Lowe’s shares have dropped about 23 percent since March of this year, Home Depot shares have basically gone nowhere over the past year-and-a-half.
Thus, these stocks are trading relatively cheaply.
Lowe’s shares trade at a forward P/E of about 14.7, and the company had been aggressively buying back stock in the first half of the year.
Home Depot shares trade at a P/E of 16.2.
Lilly believes Home Depot stocks are under pressure from investors’ negative perception of the housing market and its impact on the home-improvement sector.
Duncan contends that despite their moderate valuation, they do not make for attractive buys.
“Once the housing market stabilizes, home improvement will likely flourish, but the near-term outlook is grim,” he said. “As such, Lowe’s and Home Depot are not good buys now.
Moreover, for Home Depot, they’ve already gotten so big in a mature market; it’s going to be very tough for them, to squeeze any more growth in this kind of climate.”