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Message from HD Earnings

11/19/2013

On Tuesday morning, November 19, Home Depot Inc. (HD), the largest domestic home improvement retailer, reported Q3 earnings. During the past year and a half, the messages contained within Home Depot’s earnings and guidance have provided solid evidence as to the state of domestic housing. HD’s Q3 report was to include the first perceived “headwind” to the domestic housing recovery in the form of higher 30-year mortgage rates.

During the third quarter, the average rate for a 30-year mortgage rose to 4.44% from the second quarter’s average of 3.65% (Figures 1-3). The average for a 30-year mortgage during the third quarter of 2012 was 3.55% (Figure 4). However, based on this morning’s Home Depot earnings report, it appears the housing recovery remains intact as low inventories and recovering prices outweighed the rise in borrowing costs.

Just last week, the National Association of Realtors reported that 88% of U.S. cities reported a rise in the price of a single family home during the third quarter. The median price of a single family home (Figure 5) is now 12.5% higher than it was at this time one year ago. A reduction in foreclosure inventory is also supporting the recovery. For the third quarter of 2012, the foreclosure inventory was 1.4 million units, or 3.2% of the overall housing inventory. For the third quarter of 2013, the foreclosure inventory had fallen to 902,000 units, or 2.3% of the overall housing inventory.

Home Depot earnings highlights…

  • Q3 revenue increased 7.4% to $19.5 billion, beating estimates for $19.2 billion
  • Q3 EPS was $0.95 per share, ahead of estimates for $0.90 per share, and up 43% year on year
  • The average purchase for Q3 rose 3.2% to $56.27
  • The number of transactions for Q3 rose 4% to 344.3 million
  • Full-year guidance was raised to $3.72 from $3.60
  • Domestic same-store sales rose 8.2% during Q3, well ahead of consensus
  • On the conference call, CEO Frank Blake stated sales increased in all merchandise categories, and all regions posted comparable sales gains
  • Gross margins for Q3 rose 30 basis points, the largest increase in 13 quarters
  • Home Depot did guide gross margins lower for the upcoming fourth quarter

Late yesterday it was reported that our CNBC “Halftime Report” friend Carl Icahn made comments at a Reuters conference that equities could be vulnerable to a significant drop. At least for today, the implications from Home Depot’s earnings seem to outweigh Carl’s concerns. Maybe Carl doesn’t shop at Home Depot, I have to ask him that question next time he visits us on “Halftime.”

Figure 1 30-Year Mortgage Rates, March 2013 to November 2013

Source: Bloomberg

Figure 2 Q3 2013 30-Year Mortgage Rates

Source: Bloomberg

Figure 3 Q2 2013 30-Year Mortgage Rates

Source: Bloomberg

Figure 4 Q3 2012 30-Year Mortgage Rates

Source: Bloomberg

Figure 5 2013 S&P/Case-Shiller Home Price Index

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.