Strong second-quarter revenue growth at home improvement giants Home Depot ( HD) and Lowe's ( LOW) should dampen recent speculation that the economy could be falling into another recession, retail analysts say. "It's very unlikely we're going to see a recession right now," said Craig Johnson, president of Customer Growth Partners, a retail consultant firm. "The economy had clearly hit a speed bump in early June at the peaking of gas
pump prices ... If there was going to be a recession, these top-line numbers would be low-single digits instead of high-double digits." Home Depot reported Tuesday that second-quarter sales jumped 11% to $19.96 billion with earnings excluding items of 71 cents a share. That easily surpassed the consensus estimate for 64 cents a share. Lowe's said Monday sales spiked 17.4% to $10.17 billion, while EPS rose to 89 cents from 75 cents in the year-earlier quarter. "I don't see a recession in the near term," said Charles Georgas, a vice president at Marquis Investment Research. "I think it was the spike in oil prices. That's really overall what was creating the soft patch. When oil prices come down, you'll see continued strength." He noted that when it comes to the retail sector, sales at the home improvement retailers are hurt less than others by volatile gas prices, similarly to what Home Depot said in its post-earnings conference call. High energy prices "shouldn't have as much of an impact because Home Depot and Lowe's can benefit from home improvements when people aren't traveling as much," said Georgas. Thus, the fact that sales at the two retailers haven't come under severe pressure is a positive sign for the economy, agreed Brian Postal, an analyst at A.G. Edwards & Sons. "I think the strong commentary from both management teams that early August trends have been quite robust has helped prove that the disruption in the June/July period was just kind of a blip."
Both Home Depot and Lowe's said in earnings-related conference calls that August same-store sales are coming in strong and ahead of expectations. Analysts say the pop of gasoline prices at the pump in late May and early June had a huge psychological impact on consumers and spooked them out of extra spending. The national average at the end of May peaked at $2.06 a gallon, said Postal. It has since come down to $1.88 a gallon last week and this week, said the analyst, who does not hold shares of either company. (A.G. Edwards does not do investment banking for Home Depot or Lowe's.) "When you pay $1.88 a gallon in gas, it is that damaging? No. But it's the highest, most visible commodity that we all know," Postal said, citing, for example, that most people likely don't know how much a gallon of milk costs from memory. "When oil prices peak, people look at their checkbooks and cash account balance," Johnson added. "They hold back and get a little nervous ... There's a mental $2
a gallon break point." Home Depot and Lowe's weren't the only retailers affected, though, by the consumer malaise in June. Higher-than-usual gas prices also contributed to the moderate 3.1% July increase and 3% June rise in overall retail same-store sales, as tracked by the International Council of Shopping Centers. Same-store sales are seen as a gauge of the overall health of retailers. It was the combination of June's same-store sales, a weak employment report that showed just 32,000 nonfarm jobs were added in July, declining government retail sales figures and a second-quarter gross domestic product increase that came in well short of analysts' projections that made Wall Street become fixated on the idea that the economy could be stagnating or moving into a "double-dip" recession.
But Postal said the second-quarter results and the strength so far of Home Depot's and Lowe's August sales should put those fears to rest. He noted that the strengths are now reflected in the stock prices of the whole retail sector as well. "That portends good things for back-to-school -- as the season shifts to new merchandise trends -- that consumers are still willing to make those purchases," Postal said. Shares of Lowe's were lately up 60 cents, or 1.2%, at $49.79, while Home Depot's stock was adding $1.29, or 3.8%, at $35.27. Another gauge of the strength at both Lowe's and Home Depot, said Postal, was that the average ticket, or amount spent on average by each customer, increased in the high-single digits in the second quarter. Home Depot, for example, said average ticket increased 8.2% to $54.73 in the quarter. "The customer is making the decision to purchase higher prices and better products," Postal said. "The customer is not willing to trade down." Johnson agreed, saying that consumers are smarter and are now more willing to make purchases with what he calls "investment characteristics," such as improvements to the home or home entertainment products from retailers like Best Buy ( BBY). These types of purchases will last longer than buying cheaper apparel items that will likely wear out. For Georgas, Home Depot's recent announcement that it will increase its share buyback program proves that the company feels confident about its recent momentum. Buybacks and dividends are also a characteristic of mature consumer companies. Georgas said Home Depot management is "sending a positive sign to the market ... They believe the stock should be valued higher." (Georgas does not hold shares of Home Depot or Lowe's, and his firm does not do investment banking for them.)