Big Orange; Home Depot 1Q results soft on weather – outlook a positive signal for housing

Home Depot (HD) 1Q14 results reflect a benefit to earnings, net of tax, of $61m from a sale of a portion of the company’s equity ownership in Home Depot Supply Holdings (HDS). Exclusive of this gain, HD reported EPS of $0.96 relative to consensus estimates of $0.99. A miss in a difficult to predict quarter with spring arriving late. Nonetheless, the stock is bid based on commentary for “robust” May sales, a period less impacted by weather, and likely reflecting some pent-up demand from the spring. The colder than seasonal weather in 1Q also weighed on gross margin indicating that margin trends remain on plan.

HD doesn’t see evidence of a slowing housing market; commented on heavily in financial markets. HD’s big ticket items are outperforming small ticket and results from pro-customers continue to improve. HD’s same store sales are driven by a healthy mix of positive transaction counts and higher average tickets. The internet business (less weather impacted) rose 40%. In total, HD’s results are healthy with no major changes in trend, with its end market experiencing solid growth.

Home improvement drivers are somewhat different than total housing. Existing home turnover is the more important factor for driving HD’s retail sales. As consumers move into a new house, there is natural kitchen, bathroom, flooring, landscaping project to do. Less focused on, is HD’s massive pro business. Pro sales are more driven by new home sales; the fact that pro sales are outpacing retail sales is a positive indicator on the overall health of the housing market and new orders. Moreover, housing prices continue to appreciate and this positive wealth-based driver is helping to offset slower total home sales. The housing market clearly slowed in 1Q based on higher mortgage rates and frigid spring weather. Mortgage rates declined over the past month, along with overall interest rates, and spring/summer arrived! Fears of a cliff in the housing market look overblown.

Mortgage rates spiked in 4Q13 – this year, rates drifting lower: