August 15, 2017 / 10:08 AM / 3 years ago

Looming housing slowdown clouds Home Depot's strong results

(Reuters) - Home Depot Inc (HD.N) raised its full-year forecasts but concerns over a looming slowdown in the U.S. housing market due to supply constraints weighed on the retailer’s stock.

Shares of the No. 1 U.S. home improvement chain, which also reported higher-than-expected quarterly profit and comparable sales, fell nearly 4 percent in morning trading on Tuesday. The Dow component’s stock had risen 15 percent this year, as of Monday’s close.

Smaller rival Lowe’s Cos Inc’s (LOW.N) stock was trading down about 3 percent.

The U.S. housing market has been facing supply constraints, which has been pushing prices up. Higher lumber costs and shortages of labor and land have hampered home builders’ efforts to meet the rising demand, underpinned by a strong labor market.

“As positive as the housing market has been, there is a risk that activity will wane,” GlobalData Retail analyst Håkon Helgesen said in a client note.

“The latest numbers suggest that transactions are down slightly - not because demand has dropped off, but because there is a shortage of housing.”

Home Depot, however, allayed fears of a slowdown seeping into demand for its products, citing higher spending on home improvement.

“We expect to see continued growth in the repair and remodel market as the U.S. has experienced solid wage growth, faster home price appreciation, and the re-emergence of first-time homebuyers,” CFO Carol Tomé said on a conference call.

FILE PHOTO: The logo of Down Jones Industrial Average stock market index listed company Home Depot is seen in Encinitas, California, U.S. April 4, 2016. REUTERS/Mike Blake/File Photo

Even if housing transactions do soften, the impact on Home Depot will not be immediate, analyst Helgesen said.

The S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas, which tracks residential real estate prices, rose 5.7 percent in May on a year-over-year basis.

Home Depot on Tuesday said demand from its contractor customers also remained strong.

“Based on what we’re seeing in the stores today, our Pros (professional customers) are not on vacation,” Tomé added.

The retailer said it now expects full-year sales to grow 5.3 percent, comparable sales to rise 5.5 percent and earnings of $7.29 per share for the year ending January.

The number of customer transactions was up 2.7 percent in the second quarter ended July 30, while the average ticket value rose 3.6 percent to $63.05.

Sales at stores open for more than a year rose a higher-than-expected 6.3 percent, and U.S. comparable sales increased 6.6 percent.

Net income jumped 9.5 percent to $2.67 billion, or $2.25 per share.

FILE PHOTO - The logo of Home Depot is seen in Encinitas, California April 4, 2016. REUTERS/Mike Blake/File Photo

Net sales rose 6.2 percent to $28.11 billion, the highest quarterly sales in company history.

Analysts on average expected earnings of $2.22 per share on revenue of $27.84 billion, according to Thomson Reuters I/B/E/S.

Reporting by Sruthi Ramakrishnan in Bengaluru; Editing by Martina D'Couto

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