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Markets & Stocks
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Three stocks: Home Depot
The do-it-yourself retailer needs U.S. consumers to keep on spending.
July 2, 2003: 11:05 AM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - In the past three years, even as markets fell apart and businesses faltered, Americans kept on spending, dragging the rest of the economy along behind them.

Repeatedly economists have wondered how long consumers could hold on, and repeatedly they have been surprised by how willing consumers have been to part ways with their cash.

The source of this spending fortitude? With rates recently dropping to their lowest levels ever, homeowners have been rushing to refinance their mortgages. Some are lowering their monthly payments and others are opting to "cash out" -- pulling more money out of the equity they have in their homes. In both cases, they are left with more cash in their pockets.

Cash that often enough heads right into Home Depot's (HD: Research, Estimates) till.

It's been good times lately for the big do-it-yourself retailer. After some cost-cutting missteps that mostly served to cut away at its customer base, the company has cleaned up its act and, helped along by an improving economy, has seen a revival in both its business and its share price.

• Tuesday: Home Depot
• Wednesday: Intel
• Thursday: 3M

In the quarter ended April 30 it beat analyst estimates, and it has continued to stick by its guidance for earnings to pick up between 9 percent and 14 percent in the current fiscal year on a sales gain of 9 percent to 12 percent.

For investors who were convinced that Home Depot would keep getting its lunch eaten by smaller rival Lowe's (LOW: Research, Estimates), this all came as something of a surprise. Home Depot's shares powered higher.

Home Depot's business has improved markedly from the beginning of the year, according to FTN Midwest Research, which keeps close tabs on the company. After a bad December and a mediocre January, Midwest's contacts at Home Depot and its suppliers, along with visits to Home Depot's stores, began to indicate that sales were shifting from below plan to above plan.

"We've seen, really across the store, improving results," said Midwest Research analyst Eric Bosshard. "Part of it seems to be better merchandising, part of it seems to be improved execution, and part of it is just momentum -- once people start going to a store, they tend to return."

So life is sweet for the company, which finds itself in the position of a trout that has poised itself along a good lie in a stream. It can just sip flies off the water's surface all day, growing fat.

But will Home Depot's good times last?

"The reason I don't own more Home Depot than I do, or own both Lowe's and Home Depot, is my concern about how long the consumer can hang in there," said Julius Baer Investment Management head of U.S. equities Brett Gallagher.

The big problem is that nobody is sure how much oomph consumer spending will have if interest rates head higher and mortgage refinancing activity subsides. This is particularly worrisome in the case of Home Depot, because when homeowners spend the money they've taken out in a refinancing, they tend (sensibly) to spend it on their house.

Building Profits
Home Depot's earnings and revenue growth
Year* Earnings growth Revenue growth 
2001 17% 17% 
2002 21% 9% 
2003 11% 9% 
 * Fiscal year; 2003 projected
 Source:  First Call

"The consumer is being driven by mortgage refinancing, and this company is very tied into that whole dynamic," said Gallagher.

It's an odd situation for both Home Depot and the economy in general, points out Deutsche Bank chief U.S. economist Cary Leahey. During typical economic downturns, consumer spending has fizzled along with the rest of the economy. Then, when the economy recovers and the labor market improves, there's a boom in spending.

But in this case, consumer spending didn't fizzle, thanks largely to mortgage refinancing. As the economy recovers, then, consumer spending might not grow very much at all because the positive effects of a lower unemployment rate will be cancelled out by the negative effects of higher mortgage rates.

"It's hard to say whether a company like Home Depot would be better off with a falling unemployment rate and rising interest rates or vice versa," said Leahey.

Ditto for consumer spending in general. It may be that if the rest of the economy does, in fact, get back into recovery mode, the U.S. consumer, who has been pulling so much weight over the past three years, will take a well-deserved rest.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.