Housing Recovery Helps Home-Improvement Firms Avoid Retail Blues
May 03 2017 - 4:04PM
Dow Jones News
By Ryan Dezember and Corrie Driebusch
Home-improvement stocks are rising alongside booming U.S. house
prices and construction, making the shares a rare success story in
the depressed world of retailing.
Among the biggest gainers are big-box retailers Lowe's Cos. and
Home Depot Inc., which are up 20% and 15.4% this year,
respectively. Paint maker Sherwin-Williams Co. is up 24.4%, and
tile and hardwood retailer Floor & Decor Holdings Inc. last
week rose 52.6% from its initial public offering price on its first
day of trading, the largest IPO gain in 2017.
The S&P 500 is up 6.6% this year and the SPDR S&P Retail
exchange-traded fund, which doesn't include the home-improvement
chains, has lost 2.6%.
Behind the rally: Rising home prices and booming construction,
as the housing market recovery from the 2008 crisis advances.
Rising home prices can give homeowners equity they tap to splurge
on cabinets, floors and appliances. Accelerating construction and
transactions can tempt sellers to spend on sprucing up properties,
while a shortage of new homes often prompts shoppers to renovate
instead of moving.
"We're finally at the stage of the housing recovery where
homeowners are taking on larger projects," said Brad Hunter, chief
economist with IAC's HomeAdvisor unit, which matches homeowners
with contractors and handymen. "Home improvement is the shining
star within retail."
Some on Wall Street believe the stocks will rise further. Credit
Suisse AG on Tuesday raised its price target for Lowe's shares
roughly 13% and those of Home Depot about 6%.
Both companies still have valuations below the S&P 500,
based on their price compared with their past 12 months of
earnings, according to FactSet.
Further gains are no sure thing. The shares could fall if
homebuying and building fizzle, if for instance interest rates rise
faster than expected. Home improvement firms also run the risk of
opening too many stores, something that has plagued retailers in
other segments.
Other U.S. retailers are closing stores at a record pace as
shoppers spend more of their money online. RadioShack Corp.,
Payless ShoeSource Inc., Hhgregg Inc. and J.C. Penney Co. are among
those that have announced closings.
But home-improvement retailers have proven particularly
resilient to the migration to online shopping. For big ticket items
and major renovations, like a revamped kitchen or new tile floors,
customers often prefer to see goods in person and may need help
installing.
"These are things that don't lend themselves to the internet,"
said Stifel analyst John Baugh, who estimates that home-improvement
retail sales rose 7% through March.
The good news for these firms is that the national housing
market recovery continues to advance. In many markets home prices
have surpassed their 2006 peaks. Even those that haven't, such as
Cleveland and Chicago, have climbed more than 20% since their 2012
lows, according to the S&P CoreLogic Case-Shiller home price
indexes.
Home equity, or a property's value minus mortgage debt, has more
than doubled since 2011, to roughly $13 trillion, CoreLogic
estimates.
"If we see home price appreciation you can say that it's
creating wealth, " said Neal Austria, senior research analyst at
money manager ClearBridge Investments, which owns shares of Home
Depot and Lowe's.
Mr. Hunter of HomeAdvisor recently published a study that found
homeowners on average spent $5,157 on home repairs and renovations
during the 12 months that ended February, up more than 50% from the
prior 12 months.
Home Depot has been opening new stores, and Floor & Decor
told investors it plans to add to its 72 locations at a clip of
about 20% a year, with a target of eventually reaching 400.
Analysts have warned in the past that rapidly expanding
home-improvement retailers risk running ahead of housing
development that could quickly ground to a halt.
Floor & Decor's sales have grown by double-digit percentages
for eight consecutive years, fueling investor appetite for its
initial public offering last week.
Its shares priced at $21, above the high-end of its targeted
range, and have continued to climb, up 79% from its IPO price a
week ago, to $37.59.
At that price, Floor & Decor's private-equity owners Ares
Management LP and Freeman Spogli & Co. are up more than eight
times their 2010 purchase of the retailer from other investors,
according to a person familiar with the matter. Neither firm sold
shares in the offering.
Write to Ryan Dezember at ryan.dezember@wsj.com and Corrie
Driebusch at corrie.driebusch@wsj.com
(END) Dow Jones Newswires
May 03, 2017 15:49 ET (19:49 GMT)
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