Fly Intel: What to watch in Home Depot, Lowe's earnings reports

Home improvement retailers Home Depot (HD) and Lowe's (LOW) are scheduled to report results of their second quarters before the market open on Tuesday, November 13, and Tuesday, November 20, respectively. Home Depot's conference call is scheduled for 9:00 am EDT on Tuesday and Lowe's will hold its quarterly call on November 20 at 9:00 am EDT. What to watch for: 1. HOUSING MARKET, HOME IMPROVEMENT COMMENTARY: On October 16, the NAHB said builder confidence was up one point from September at a reading of 68 for the month of October. "Builders are motivated by solid housing demand, fueled by a growing economy and a generational low for unemployment," said NAHB Chairman Randy Noel. Morgan Stanley analyst Simeon Gutman said "yellow flags" have emerged in the housing market over the last several months and he now believes a moderation in demand seems likely over the next 6-12 months. His firm's survey of contractors showed lower optimism around future conditions and said Home Depot and Lowe's shares are "clearly pricing in some degree of moderation." Credit Suisse analyst Sigman is concerned that home prices will continue to moderate, at least temporarily, as higher rates weigh on affordability. Sigman still sees EPS growing, but sees less upside over the next 12 months relative to current estimates and views Home Depot as best-in-class in retail, but struggles to find multiple upside as housing sentiment shifts and some uncertainty arises. 2. COMPETITION WITH ONLINE RETAILERS: Analysts and investors will listen for comments on how the home improvement retailers view competition with online retailers like Amazon (AMZN). Wedbush analyst Seth Basham said Lowe's CEO Marvin Ellison's success in turning around retail fundamentals at Home Depot bolsters the likelihood that he can execute a very similar plan at Lowe's, with material top- and bottom-line growth despite this period of investment and change, along with strong competition from Home Depot and Amazon. 3. GUIDANCE: Home Depot's Q2 results beat the Street's expectations, and raised its FY18 EPS view to $9.42 from $9.31 and sales growth guidance to up approximately 7% from about 6.5%. Home Depot also raised its SSS view for the year to about 5.3% from about 5%. Lowe's Q2 EPS and sales were relatively in line and its SSS gained 5.3%, better than the 0.6% gain in Q1, but cut its FY18 EPS view to $4.50-$4.60 from $5.40-$5.50 and lowered its revenue view to up about 4.5% from up approximately 5%. The retailer also reduced its SSS view to up about 3% from up about 3.5%. At the time, Lowe's said it would eliminate about $500M in planned projects in 2018. Credit Suisse's Sigman said he expects meaningful improvement in sales and operating profit at Lowe's under new CEO Marvin Ellison, but that consensus estimates are baking that in. OTR Global's checks indicate Lowe's Q3 sales accelerated from Q2 led by store level improvements, inflation and weather-related repairs. The firm's analyst also said Home Depot's sales growth remained strong. 4. LOWE'S TO CLOSE STORES: On November 5, Lowe's said it will close 51 underperforming stores in the U.S. and Canada as part of an ongoing strategic reassessment. The expected impact on fiscal 2018 earnings per share is expected to be 28c-34c. "While decisions that impact our associates are never easy, the store closures are a necessary step in our strategic reassessment as we focus on building a stronger business," CEO Marvin Ellison said.