Today’s housing data was broadly mixed, with Starts coming a shade below estimates and Permits a tad above consensus levels. The Starts weakness was primarily in the multi-family (or apartment buildings) category, which tends to be volatile on a month-to-month basis. The seasonally adjusted annualized levels for both Starts and Permits is a little over one million units, which is materially up from the bottom, but still way below our prior peaks around 2005. The strong gains in the homebuilder sentiment data that came out on Tuesday appears to be out of sync with this Starts data, but those survey results nevertheless point to better times ahead for the sector.
Both Home Depot (HD) and Lowe’s (LOW) shared cautiously optimistic outlooks for the housing sector in their Q3 earnings reports. Lowe’s came out with better-than-expected results this morning and raised outlook for the rest of the year. Its results come a day after Home Depot reported strong quarterly numbers, but investors weren’t satisfied with the HD report given uncertainties about the final tab for the data-breach issue. Both companies shared cautious optimism about the housing sector. Target (TGT), which also reported better-than-expected results this morning and had suffered a data breach last year, stated that future expenses related to its data lapse wouldn’t be material.
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Including this morning’s reports, we now have Q3 results from 79.1% of the retailers in the S&P 500 that combined account for 90.9% of the sector’s total market capitalization (for the index as a whole, we now have Q3 results from 475 members). Total earnings for these retailers are up +1.8% on +5.4% higher revenues, with 67.6% beating earnings and 55.9% beating revenues estimates. These are weak results in absolute terms, but they have been better relative to the extremely low levels to which expectations had fallen.
As you can see from the Q3 growth numbers, the issue isn’t so much with sales growth as it is profits; it’s actually a margins issue. And that’s a function of the extreme promotional environment that has been in place for some time now and will likely get even more acute this holiday season. No doubt the sector has been one of the weaker performers this year.
