Home Depot Bullish On Housing Market Despite Rate Fears

Home Depot came out of a rough winter with brighter earnings and sales expectations Tuesday as housing-market momentum firmed up heading into the summer, though concerns about higher interest rates still loom.

While Q1 U.S. GDP growth was below consensus estimates, "housing data remain positive and supportive of the housing recovery," CEO Craig Menear said on a conference call. "And the growth that we see in our business also supports the view of a continued recovery in the U.S. housing market.

The home improvement retailer's fiscal Q1 report came as the Commerce Department said April housing starts surged 20% to an annualized pace of 1.14 million units, the highest in 7-1/2 years. Permits leapt 10%.

But Home Depot (HD) shares closed down 1.7%, reversing lower after gaining as much as 1.9% earlier in the day.

The company's fortunes are tied more to sales of existing homes, which also have been seeing some improvement in recent months, Wedbush analyst Seth Basham told IBD.

The Big Question Mark

"That should be a tailwind through the rest of 2015, offsetting a weaker GDP in the quarter," he said.

Home Depot raised its full-year sales growth guidance to 4.2%-4.8% from 3.5%-4.7%, exceeding consensus forecasts for a 4% advance.

The company also lifted its EPS outlook for the year to $5.24-$5.27 from $5.11-$5.17, topping views for $5.23. Its revised guidance doesn't include any future costs related to an earlier data breach.

But the big question mark is interest rates, Basham warned, adding that an increase of more than 100 basis points could cool some demand.

Home Depot CFO Carol Tome said on the earnings call that "even in the face of potentially higher rates, and who knows when that might occur ... we don't see any near-term pressure on our business.

In its fiscal Q1 ended May 3, earnings jumped 21% to $1.21 per share, beating estimates by 6 cents. Revenue climbed 6% to $20.9 billion, above Wall Street views for $20.8 billion. Online sales leapt nearly 30%.

Same-store sales rose 6.1%, and U.S. comps were up 7.1%.

Broad Sales Growth

Ken Perkins, CEO and chief analyst at Retail Metrics, noted that the 120 retailers it tracks are expected to collectively report a 2.3% comp gain vs. Home Depot's 6.1%.

"They continue to fire on all cylinders," he said.

Home Depot's better-than-expected start in 2015 was helped by a "more normal spring" after winter battered the Northeast, CEO Menear said.

All 19 of the company's U.S. regions saw positive comparable-sales growth in the quarter, with the Western division performing the best, led by markets like San Francisco, Sacramento, Colorado and Seattle.

Sales growth was spread across departments, including water heaters, appliances, tools, riding mowers and all outdoor garden categories, he added.

Archrival Lowe's (LOW) is slated to report Q1 earnings Wednesday before the market opens, shedding more light on housing and home repair.

Lowe's is projected to report a 28% increase in Q1 EPS to 74 cents on a 6.6% rise in sales to $14.28 billion. Its shares also fell 1.7% Tuesday.