Why Home Depot And Lowe’s Sales Will Heat Up In 2013

After years of reeling under the housing downturn, North America’s largest home improvement retailers Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) are hoping that this year’s spring will finally bring a long awaited bloom in retail sales of home goods and furnishings. And with the U.S. housing market finally getting back on track in recent months and an improvement in general employment levels, investors have plenty of reason to share the excitement.

Our complete analysis for Home Depot’s stock

Spring marks the peak selling season for home improvement retailers with home construction and rebuilding activity picking up after a long, hard winter. And speaking of long, hard winters, that’s exactly what Home Depot and Lowe’s seem to have been stuck in for the last five years or so. The housing bust of 2009 took a heavy toll on the two retailers’ top lines as the triple whammy of rampant foreclosures, declining consumer spending and an all-time low demand for new housing drove revenues southwards.

But the thaw finally set in over the course of the last two years as key housing indicators signaled a definite recovery in demand for homes in the US. New home sales crawled their way up to 367K for 2012, the highest since 2009. Permits for new constructions stood at 624K for 2011, the highest since 2008. Home vacancy rates for both rental and home-owned properties also declined in 2011 compared to the 2009-10 period. Meanwhile, construction spending rose 0.9 percent in 2012 to a $885 billion, the highest levels seen since August 2009. ((“Construction Spending Rises More Than Forecast on U.S. Housing“, Bloomberg, February 2013)) The growth in demand for new housing has been complemented well by lower foreclosure rates. In December 2012, there were around 56,000 completed foreclosures in the U.S. compared to 71,000 in December 2011.

What all this means for Home Depot and Lowe’s is simply more customers. The improvement in general employment levels in the U.S. over 2012 also means these customers have more purchasing power than the lean period of 2009-10. Adding all this up, we estimate that demand for home improvement products in key segments should rise at an annual rate between 2% and 3% over the next few years, driving the two companies’ top-line numbers.

And the companies themselves seem to have a lot of confidence in the general environment these days. Home Depot, for instance, has decided to hire as many as 80,000 additional seasonal workers to handle the incoming spring traffic in their stores. That’s up from 70,000 last year. ^[1] And that’s why the company’s investors definitely have reason to look forward to a hotter 2013.

We have a Trefis price estimate of $59 for Home Depot’s stock, which we will revise once the company’s 2012 full year earnings  are out.

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1. “Home Depot to hire 10,000 more seasonal workers in spring“, Reuters, January 2013 [↩]