Retail
The Five-Day Forecast: Home Depot vs. Lowe's
 By David Sterman
RealMoney Managing Editor
5/16/2008 7:42 AM EDT
URL: http://www.thestreet.com/p/rmoney/retail/10417069.html

It's a fairly light economic calendar for the week ahead, so let's look at some upcoming earnings reports.

Taking The Pulse of Retailers

You can expect lots of volatility when retailers deliver first-quarter results in coming days. As the accompanying table shows, retailers such as Gamestop (GME) , Aeropostale (ARO) , Foot Locker (FL) , BJ's Wholesale (BJS) and Talbot's (TLB) are set for huge year-over-year profit gains.

Looking at those names, no clear themes emerge. Clearly, the discounters are making hay right now, but sales trends are also holding up well in other retail categories.

However, investors need be wary of debt-laden retailers during economic slowdowns. For example, Cost Plus (CPWM) , which is set to report on Wednesday, May 21 is buckling under a rising debt load. The home furnishings retailer is on track for its third straight year of losses and will need to either raise lots of cash (at distressed prices), or follow fellow retailer Bombay into bankruptcy.

It's also worth noting on this table that retailers aren't especially cheap right now, as you would expect to be the case during the economic slowdown. Of course, their fortunes will be temporarily boosted by the tax rebate checks, but much of that money is likely to be earmarked for credit card debt paydowns. When I see retailers sporting single-digit P/E multiples, I'll be a lot more excited about these names.

Retail Earnings Forecasts
Company Ticker Expected Q1 EPS Year-Over-Year Change Projected Y/Y Sales Growth 2008 P/E Ratio
Dick's Sporting Goods DKS $0.18 -5% 12.4% 19.5
Home Depot HD $0.37 -30% -18.4% 16.6
Staples SPLS $0.30 3% 5.0% 15.8
Target TGT $0.71 -5% 6.9% 15.6
BJ's Wholesale BJ $0.27 35% 7.6% 16.0
Lowe's LOW $0.40 -17% 1.6% 16.2
Saks SKS $0.16 -16% 2.6% 31.0
Talbots TLB $0.13 30% -1.2% -22.3
Cost Plus CPWM ($0.95) Neg. -0.1% Neg.
Dillards DDS $0.21 -58% -4.6% NM
Gymboree GYMB $0.82 22% 12.7% 15.0
Hot Topic HOTT ($0.04) Neg. 1.3% 13.3
Limited LTD $0.08 -38% -18.6% 13.7
Pacific Sunwear PSUN ($0.10) Neg. -0.4% 16.0
AnnTaylor ANN $0.36 -22% 1.1% 15.3
Barnes & Noble BKS $0.05 -50% 2.0% 17.4
Gamestop GME $0.34 89% 33.7% 23.9
Pep Boys PBY ($0.02) Neg. 20.0% 60.0
Aeropostale ARO $0.25 47% 14.9% 17.6
Foot Locker FL $0.15 36% -3.1% 18.7
Gap Inc. GPS $0.30 20% -3.1% 15.3
NM=Not Meaningful

Battle Of The D-I-Y Stores

Home Depot (HD) is set to release quarterly results on Tuesday, May 20, while archrival Lowe's (LOW) is expected to weigh in the next day.

In years past, investors assumed that in economic downturns, homeowners would spend money on home repairs if they couldn't trade up to the next house. That has clearly not been the case this time around, as both Home Depot and Lowe's have been generating negative year-over-year sales comps for much of the last two years. And that trend is likely to continue throughout 2008.

So expect little cheer on the conference calls of these two D-I-Y retailers. Lowe's is expected to post a profit drop of 17% from a year ago, while Home Depot's profits likely fell close to 30%, according to consensus estimates. And analysts think that second-quarter profits are also likely to be down 10%-20% for each of these firms. After that, the year-over-year comparisons will likely become much more favorable. Not only will year-ago results be comparatively weak. But many economists think that housing sales will bottom out in coming months and could show signs of life later in the year. If and when that happens, many consumers will drive to their local D-I-Y stores and spend money to primp up their houses for sale.

So here's the play. Listen to next week's conference calls. Get a feel for how close these management teams think that they are to a bottom in their businesses. You don't want to wait until they have found a bottom. You want to buy their stock while the bleakness persists, but is winding down. If either of these stocks take a hit after next week's earnings reports, you may want to start building positions. If you wait until the housing market snaps back to life, it may be too late.

Which stock is more appealing? It depends on whether you think consumers or contractors will be the primary buyer of housing products. Lowe's is generally known as being more consumer-friendly, while Home Depot is perceived as appealing to contractors.

Intuit Finishes Quarter On A High Note

I hate to go out on a limb and predicts a surprisingly positive earnings announcement, but Intuit (INTU) appears to have finished the fiscal third quarter on a high note. Sales of TurboTax software (which account for 30% of sales) surged in early April, and were likely up 15%-20% from a year ago. Notably, Intuit has beaten estimates by at least 10% in each of the last three quarters. However, investor expectations remain quiescent, as shares have been trading near the 52-week low.

Some investors are concerned that Intuit's other businesses, primarily accounting software for small-to medium sized businesses (SMB), have materially slowed along with the economy. But it's important to remember that a slowing economy leads to a spike in new business creation, which should fuel demand for Intuit's QuickBooks software programs (which account for 21% of sales). So fears of a slowdown in this segment could be overblown. In a similar vein, demand for payroll services (18% of sales) and professional tax services (9%) could also fare better than many have expected.

David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.