Mooresville-based Lowe’s Inc. and rival Home Depot are riding the U.S. housing recovery with strong sales and profits, but executives are keeping an eye on rising interest rates that could threaten the boom.
Both new housing construction and renovations on existing homes are helping to buoy the industry, Lowe’s chief executive Robert Niblock said.
“The improvement in home prices has been a lot of what has helped in the industry,” Niblock told the Observer.
On Wednesday, Lowe’s reported its second-quarter profits increased 26 percent compared to the same quarter last year, to $941 million. Sales jumped 10.3 percent, to $15.7 billion, and sales at stores open a year or more – considered a key measure of a retailer’s health – rose 9.6 percent.
Consumers are getting their confidence back as they watch the value of houses go up, Niblock said. And that’s leading to big-ticket purchases they might have held off on during the recession.
“It’s no different than what you’re seeing in the auto industry,” said Niblock. “(Consumers) are feeling gradually better about things.”
Pent-up demand from consumers getting back to purchasing outdoor goods after a wet spring also helped Lowe’s, Niblock said, as did stronger appliance sales. And Niblock said Lowe’s is reaping the benefits of adding 150 weekly additional employee hours to many of its stores during their busiest times.
The Commerce Department reported last week that new housing starts were proceeding at an annual rate of 896,000 in July, up almost 21 percent from the same month a year ago.
But interest rates have been rising on mortgages, which Niblock said could derail the housing recovery. Housing lender Freddie Mac reported that 30-year fixed mortgage rates averaged 4.37 in July, up from 3.45 percent in April.
“If you were starting to see interest rates that move north of 6 percent for a 30-year mortgage, we think that would have some impacts … in our business,” said Niblock.
That means Niblock and many other businessmen are watching for when the Federal Reserve decides to “taper,” or decrease its monthly bond purchase. The $85 billion-a-month bond buying program has kept interest rates low, but the central bank could start tapering as soon as next month.
“For whatever reason, the market seems to have a pretty violent reaction whenever they hear that,” Niblock said of possible moves to cut bond purchases.
Lowe’s has been examining its inventory and adjusting what products it carries. Wayne Hood, an analyst with BMO Capital Markets, said in a note to investors that Lowe’s results show those steps have been paying off with consumers.
“This could signal that the company’s product line reviews and merchandise assortment overhaul are starting to work,” Hood wrote.
Lowe’s gross profit margin increased during the quarter to 34.35 percent of sales, up from 33.93 percent a year ago. And selling, general and administrative expenses fell to 21.73 percent of sales, down from 22.26 percent a year ago.
Home Depot reported earlier this week that its second-quarter sales rose 9.5 percent, to $22.5 billion, and profits were up 17 percent, to $1.8 billion. Sales at Home Depot stores open a year or more increased 10.7 percent, the company’s first double-digit comparable store sales growth since 1999.
Hood noted that the gap between Lowe’s and Home Depot’s sales gains at stores open a year or more was the narrowest since the third quarter of 2010, indicating that Lowe’s is making up ground.
Lowe’s operates 1,758 stores in North America. The company plans to complete its $205 million acquisition of 72 Orchard Supply Hardware stores in California this month, which will boost its presence on the West Coast.
Niblock said Lowe’s has been “under-stored” in California, where Home Depot has more locations. Over the next few years, Lowe’s will look at expanding more into the Northeast and south Florida, both areas where Lowe’s is also “underpenetrated.”
Shares in Lowe’s closed up $1.73, almost 4 percent, at $45.81.