Improve Your Portfolio With These Home Improvement Companies

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The housing market in North America is expected to recover with growing consumer sentiment. According to the National Association of Home Builders, the sales of new homes surged 8.3% to 497,000 units in June, the fastest pace in the last five years. Moreover, the housing market is expected to grow by 3.1% annually in the next five years. California is especially driving the growth of the home improvement companies. Three home improvement companies are pushing hard to gain more market share by opening new retail stores and upgrading their online services.

Enhancing online platform by adding more features

Lowe's (NYSE: LOW) recently entered into agreement with Orchard Supply Hardware to acquire the majority of its assets for around $205 million. With this acquisition, Lowe’s will be offering its products to new customers and enhance its presence in the densely populated markets of California, where Orchard has 89 stores. Currently, Lowe’s is operating 110 stores in California, and it will acquire at least 60 Orchard stores, which are located in highly attractive markets of California where Lowe’s has negligible presence.

In the last fiscal year, Orchard reported revenue of $657 million, and Lowe’s expects, by adding Orchard under its portfolio, it will generate revenue of $52.3 billion this year from $50.5 billion in the last fiscal year.

Lowe's reported strong quarter-over-quarter revenue growth of 18.5% to $13.09 billion in its first-quarter (ended May 3) results backed by recovery in the housing market combined with continuous reconstruction activities after Hurricane Sandy. These reconstruction activities should continue, which will boost demand for home-related products, especially plumbing, kitchen appliances, and other electronic items in the U.S., by around 3%, year-over-over, to $145 billion this year. Lowe's has a market share of nearly 11.5% in the U.S. home-related items, just 2.5% less than its strong competitor, The Home Depot (NYSE: HD), which holds nearly 14.2% share.

To gain more market share in North America, Lowe’s plans to open 10 new stores this year. It has also improved its online sales platform, “MyLowes,” with the introduction of a smartphone application. In addition, MyLowes’s online personalized tools enable customers to design their home interior and help them execute the designs via broad user friendly content and state-of-the-art technology. The company expects MyLowes will help it regain market share by attracting more customers with its personalized offerings. These initiatives will help Lowe's improve its EPS by around 19.5% to $2.12 this year and $2.56 next year.

The Home Depot’s home-related products contribute nearly 27% to its revenue. To compete with Lowe’s, the company initiated its interconnected retail strategy by rolling-out its “Buy Online, Ship-To-Store” facility. This will give customers access more than 300,000 items in its stores, and it expects to improve its online business. Moreover, by leveraging its “First Phone” mobile technology, Home Depot enables buyers to verify product prices and availability.

The company is expecting additional sales of 4%-7% this year. Moreover, its previous acquisition in the home services marketplace, Redbeacon, a one-stop online solution, helps customers connect with contractors for home maintenance, repair, and redesigning needs. Therefore, the company expects to report EPS of approximately $3.59 in 2013 and $4.18 next year from $3.07 last year.

Opening new stores and remodeling will drive revenue

Lumber Liquidators (NYSE: LL) recently posted its second quarter results. Its sales reported year-over-over growth of 22.2% to $257.1 million with a 14.9% rise in comparable store sales. Increased customer traffic, which has contributed 9.1% to comparable store sales, drove this growth. The company expects Hurricane Sandy, which contributed $145 million in the second quarter, will help its comparable store sales grow further.

The Remodeling Market Index, or RMI, rose by 6 points to 55 in the second quarter, and the expected growth in home sales and rise in demand for remodeling projects will help home improvement companies. To grab this opportunity, Lumber Liquidators plans to remodel more than 25 existing stores and expects to relocate its stores to highly traded areas in the second half of 2013. By adopting these strategies, the company anticipates gross profit in the second half will expand by around 2.3% on a year-over-year basis, and it anticipates annual comparable store sales to exceed $885 million this year from $743.4 million last year.

With the aim of grabbing growth opportunities in North America, Lumber Liquidators plans to increase it store counts by opening around 35 new stores in “stores of the future,” or SOF, format this year. The SOF format focuses on opening stores in posh locations, which will grow the sales of its high priced flooring combined with higher profit margin. To date, it has opened 12 new stores and announced the opening of its 300th store in Las Vegas. With this, the company placed itself as the largest specialty retail store of hardwood flooring in North America. These new format stores will offer more than 340 featured flooring varieties, which will attract more customers and enhance the shopping experience. By increasing store counts, Lumber Liquidators expects to generate higher revenue with an improved gross margin of around 40% this year compared to 38.5% last year. 

Conclusion

Looking at the strong growth opportunities for home improvement products in the U.S., especially in the Hurricane Sandy affected region, Lowe’s is enhancing its online marketplace, and its recent acquisition in the Golden State will help grow earnings. Meanwhile, The Home Depot, by rolling-out its “Buy Online, Ship-To-Store service” and upgrading its “First Phone” mobile technology, will be able to attract more customers, resulting in higher growth opportunities. Lumber Liquidators is opening new stores and remodeling existing stores to enhance its revenue and gross margin.

I recommend buying all of these stocks.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe's, and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus