Build up Your Portfolio with This Home Retailer
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There have been a number of positive signs coming in for a potential economic recovery. With better employment numbers and consumer spending moving up, the optimists have started gaining hopes of better days. This has been reflected and reaffirmed by growth in retail numbers which have increased by 0.8%, showing consumers’ willingness to spend. Also, the home builders’ confidence index has been on the rise. The Wells Fargo builder confidence index has witnessed its highest point since 2007 at 37.
These factors are definitely impacting the home improvement retailers favorably. An apt example here is Home Depot (NYSE: HD), which posted constructive second quarter results.
What Exactly Happened…
Increase in high spending segments such as kitchen remodeling boosted performance for the quarter. People have been reaching out for kitchen appliances and other items, propelling volumes higher. On the other hand, cost cutting initiatives worked wonders for the company’s bottom line, which increased 12% over last year.
In fact, the revenue picture would have been better if there hadn't been a shift of consumer spending in the first quarter due to a warmer winter. This led to more demand for summer products, such as gardening tools in the previous quarter itself. It had a negative effect on the second quarter’s small purchases of products which are less than $50. However, customers’ willingness to buy high end products had a more than compensating effect on the results. Also, it seems that there is significant improvement in the markets where Home Depot has a strong presence, such as California and Florida. These places were the most affected in the recession but are now picking up pace, which brings us some relief.
Also, the problem of demand pull in the first quarter has not been unique to Home Depot. A similar pattern was faced by Lowe’s Companies (NYSE: LOW), enabling it to post a blockbuster first quarter. Lowe’s is a smaller rival when compared to Home Depot, and the former has been losing its market share to the latter lately. However, with the growing popularity of e-commerce, both the companies have been focusing on their online operations in order to make their e-commerce businesses much more efficient and effective.
Some More Reasons…
Home Depot is the largest player in the industry and is known for its headstrong business providing continuous value to its shareholders. This will persist in the coming months, as it plans to buy back shares. The home improvement retailer has also provided value to investors by way of price appreciation amidst all the economic problems. Since the beginning of the year, it has increased 35%, which is way above Lowe’s returns of 10%. In fact, when compared to other competitors, such as Best Buy, Home Depot is leading; Best Buy has fallen 13% since the start of the year.
Apart from these favorable reasons to bank on Home Depot, there is one strong point which should not be forgotten. Amidst a weak and uncertain economy and a poor real estate industry, consumers will always try to make the best of existing homes instead of buying new ones. Additionally, a customer facing problems with an existing house will try to look out for ways to mend it and avoid investing in a new one. Hence, the retailer will benefit from those moderations and remodeling as well.
The retailer looks like a safe bet in any kind of situation since it will benefit whether its customers’ splurge on new homes or spend on their existing ones. Moreover, it is largely witnessing volume increases and has been snatching away market shares from its rivals. Its initiatives to make the customer experience better also look to work positively. Home Depot has been growing slowly and steadily since its low in 2008. All these things factored in with an upgraded outlook for the year make me think positively about the company. Investors should definitely take notice.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Best Buy. Motley Fool newsletter services recommend The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.