Lowe's, Home Depot's Healthier Earnings Hint at Less-Sick Housing Market

Last Updated Feb 23, 2010 4:42 PM EST

It's too soon to claim that the U.S. housing market is recovering. But perhaps we are seeing at least at the beginning of the beginning.

The recent favorable financial results of Lowe's (LOW) and Home Depot (HD) suggest that consumers are spending more on their homes. This implies that people have enough faith in the value of their homes to make it worthwhile to spend more "do it yourself" projects.

Lowe's sees higher-ticket items selling better as homeowners take on bigger tasks, said Chairman and CEO Robert Niblock. "The consumer is out there thinking more about these discretionary-type projects as the environment improves overall," he said during the earnings call. "[It's] just another sign that we think we're going through that bottoming process."

Home Depot saw more demand for appliances, windows and water heaters. Sales of items costing more than $900 were only down one percent after double-digit declines in previous quarters.

Both Lowe's and Home Depot posted a profit during their third quarters, which were completed at the end of January, and reported favorable outlooks for the coming fiscal year. In the case of Lowe's, its profit of $205 million was the retailer's first quarterly earnings gain in more than two years. Home Depot's profit came in at $342 million, up from a $54 million loss at the same time last year.

Sales at both chains, though, are still tepid. Lowe's comparable store sales declined 1.6 percent, though that was a vast improvement from their 6.7-percent decline through the entire fiscal year. Same-store sales at Home Depot fell 1.1 percent year over year in its fourth quarter, but that is good news compared to the 6.2 percent drop for the full year.

Scot Ciccarelli, an analyst for RBC Capital Markets is hopeful about both companies and the housing market in general. "We believe the global investor demand to own these stocks as a proxy for the turn in the US housing cycle is substantial," he told Dow Jones.

Good news, even of the modest kind, is certainly welcome, but don't expect a robust housing bounce any time soon. As with Lowe's and Home Depot's sales rebounds, bottoming-out will be a gradual process.