Bed Bath & Beyond Inc. (BBBY), The Home Depot, Inc. (HD): Retailers Ride Housing to Bigger Profits

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Bed Bath & Beyond Inc. (NASDAQ:BBBY) released its fiscal first-quarter earnings numbers in line with expectations. Investors sent its stock higher on the news, even though it merely matched analysts’ forecasts across the board. The numbers follow an impressive first-quarter report from fellow housing retailer The Home Depot, Inc. (NYSE:HD)

Can investors expect the rally to continue?

Bed Bath & Beyond Inc. (NASDAQ:BBBY)

What’s behind the report

Bed Bath & Beyond Inc. (NASDAQ:BBBY) earned 93 cents per share in the first-quarter, matching the consensus estimate. It narrowly beat revenue estimates of $2.60 billion at $2.61 billion.

Same-store sales are behind Wall Street’s optimism. The company reported a 3.4% increase in same-store sales compared to the year-ago period. Like many retailers, Bed Bath & Beyond Inc. (NASDAQ:BBBY) is engaged in a rapid share repurchase plan. The company announced repurchases tallying 5 million shares, worth $324 million. Some $2.1 billion remains in its December 2012 repurchase authorization. If the company were to repurchase those shares at the current market price, share count would fall by more than 20%.

Bed Bath & Beyond Inc. (NASDAQ:BBBY) is growing shareholder value from the inside. The company has plans to return much of its earnings to shareholders as the maturing retailer cannot find sizable growth opportunities within its network of 1,478 stores.

The Home Depot, Inc. (NYSE:HD) is another housing-related company using buybacks, not new store openings, to drive growth. The Home Depot, Inc. (NYSE:HD) plans to open only nine new stores against a current portfolio of 2,256 open locations. It will return some $17 billion to shareholders via buybacks by 2015, since organic growth in store count is muted by its already dominating market position.

Watch this housing statistic

An improvement in housing underpins the gains in Bed Bath & Beyond Inc. (NASDAQ:BBBY) and The Home Depot, Inc. (NYSE:HD). As home sales pick up from an anemic, post-financial crisis pace, both companies benefit from remodel purchases and the sale of new fixtures and furniture.

A key metric for both retailers is household formation. When a 20-something moves out of mom’s house, a new household is formed, which leads to the sale of various new home essentials. The Home Depot, Inc. (NYSE:HD) and Bed Bath & Beyond benefit from new household formation.

Household formation is very positive. Here’s a chart of households as a percentage of population:

When this chart turns up, new households are forming. That means dollar signs for focused retailers.

Why retail is the best bet on housing

As rates rise from their lows, investors are calling for a pullback in new home construction. Home builders were targeted for their exposure to interest rates, since higher interest rates put a damper on new home sales.

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