The Home Depot, Inc. (HD), Lowe’s Companies, Inc. (LOW): Look Beyond Home Improvement Retailers

The housing market recovery has been good for home improvement retailers and the home goods sector as well.

As has previously been reported, the housing market is in the early stages of a shaky recovery. Inventories remain tight even though rising interest rates may have recently caused a pullback in homebuilders’ share prices. Interest rates have climbed by 100 basis points in the past month or so. In other words, the housing market recovery is going about as well as Derek Jeter’s recovery from a broken ankle – both have yet to get their sea legs back, so to speak.

Home Improvement Retailers’ Performance

The Home Depot, Inc. (NYSE:HD)The home improvement retail sector has performed well in 2013. This can be seen in the continued solid results of The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW).

The Home Depot, Inc. (NYSE:HD) has long been a strong performer with a good track record of earnings per share growth. This is due in large part to consistent revenue growth. In the past year or so, the share price has risen by about 40%. That said, the retailer’s stock price is hovering at about $80 per share – a bit off the 52 week high. Also, the company’s price/earnings ratio is 25.24, and this exceeds the S&P’s P/E ratio of 17.7. So some profit taking could be in order, as a more solid housing recovery in the coming year will be needed to take the share price higher.

The Home Depot, Inc. (NYSE:HD)’s lead competitor is Lowe’s Companies, Inc. (NYSE:LOW). Some observer’s claim the company hopes to rebrand itself by putting some distance between the two outfits with a new advertising campaign. Lowe’s Companies, Inc. (NYSE:LOW) hopes to convince customers to tackle more home improvement projects while closing underperforming stores. The retailer is also looking to boost its online sales as it makes a push into the California market by way of the recent acquisition of Orchard Supply.

Like its competitor, Lowe’s Companies, Inc. (NYSE:LOW) is trading at a premium at about $45 per share, along with a price/earnings ratio of 25.97. In short, investors should consider alternatives like the home goods sector.

The Home Goods Sector at a Glance

The home goods sector includes outfits that manufacture and distribute home furniture, household accessories, so-called “soft furnishings” (draperies and curtains), appliances, cookware and the like.

A recovery in the housing market has helped this sector recover from the Great Recession of 2008 as consumers reined in non-essential spending and held off home improvement projects due to lower disposable income. Obviously, home ownership and improvements are key drivers of the home goods sector.

One of the lead retailers here is Bed Bath & Beyond Inc. (NASDAQ:BBBY). The home goods store operates more than 1,000 outlets including other shops like Buy Buy Baby, Harmon Face Value and Christmas Tree Shops. The outfits court consumers in search of products like small kitchen appliances, pots, pans, and sundry items for the bedroom like sheets.

In 2013, the share price has climbed more than 35%. This is due in part to 3.4% growth in same store sales and overall sales growth of 18% year-over-year. And the outfit anticipates sales to rise by about 7% in 2014.