New York, NY, May 15--Wall Street expects Home Depot Inc. and Lowe's Cos. to report higher first-quarter earnings next week, in line with forecasts, even though bad weather and the war in Iraq kept many do-it- yourselfers away from stores.
Of key interest in the companies' reports will be their same-store sales trends relative to each other, as investors look for signs Home Depot is slowly regaining some momentum. Lowe's reports earnings Monday, while industry giant Home Depot reports Tuesday.
Wall Street currently expects Home Depot to earn 37 cents a share, up from 36 cents a year earlier, according to Thomson First Call. Lowe's is expected to earn 52 cents a share, up 18% from year-ago earnings of 44 cents, and within its February forecasted range of 51 to 53 cents.
The housing market has been solid and interest rates remain low. But weather was terrible in February, March suffered from the war and "CNN Effect," and April's weather, while better than February, was a far cry from a strong spring, Sanford C. Bernstein analyst Colin McGranahan said in a research note Thursday.
Many analysts expect Home Depot to post a decline of between 2% and 4% in same-store sales, or sales among stores open at least a year. That's an improvement over a 6% decline in the fourth quarter, but still lags the 2% to 4% increase in same-store sales expected from smaller rival Lowe's as it continues to enter Home Depot's markets.
Some of the home-improvement companies' suppliers have had weaker results or lowered expectations, and Wal-Mart Stores Inc.'s disappointing first- quarter sales are also on investors' minds, said Midwest Research analyst Eric Bosshard.
For the home-improvement retailers, he said, "It's a quarter for them to distinguish themselves or say they're seeing some of the same challenges."
Improvements in Home Depot's inventory levels and an increase in advertising may have helped the Atlanta company limit its same-store sales decline to 2%, said McGranahan. Meanwhile, Lowe's commented in March that February results were below the Wilkesboro, N.C., company's guidance in February for 2% to 4% same- store sales growth.
"We think Home Depot may be able to close performance gaps to Lowe's that had been widening over the last several quarters, and HD may have some ability to exceed investor expectations relative to its performance vs. Lowe's," McGranahan wrote.
He rates both companies at market perform. McGranahan doesn't own either stock, and neither is an investment-banking client, but Sanford Bernstein or its affiliates have investment discretion over accounts that include shares of both companies.
Legg Mason analyst David Schick expects both companies to post improved gross margins. Home Depot should benefit from its ongoing efforts to cull its merchandise lineups, while Lowe's efforts to pull customers up the price ladder should result in a favorable product mix.
Several analysts noted shares of both companies are up sharply in recent months. Shares of Home Depot are up 32% since just before its fourth-quarter report, and Lowe's has risen 24%, outpacing the Standard & Poor's 500 Stock Index, noted Bernstein analyst McGranahan.
"Despite the difficult first-quarter environment, the stocks are anticipating reasonable results, or investors are at least willing to look through the 1Q performance," McGranahan said.
Deutsche Bank Securities analyst Michael Baker said he hopes to see signs Home Depot is stemming market share losses and improving its capital efficiency.
