Tickers in this Article: LOW, HD, TSCO, SHLD, LL
When Lowe's (NYSE:LOW) reported its first-quarter earnings on May 18, Wall Street read its significant earnings decline as better-than-expected news, something which cheered the market. Lowe's added a weak outlook for the second quarter which will end this July. When taken with the similar downbeat earnings from Home Depot (NYSE:HD), despite Wall Street's cheers, investors might want to mull over where we are with the home improvement stores versus the recession, and what it can tell us about the economy.

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The Lowdown on Lowe's

Sales declined for the quarter from $12 billion in the same quarter last year to $11.8 billion this year, with net income down 21.6% to $476 million, or down to 32 cents per share from 41 cents a share. The outlook next quarter is for same store sales to be off by 4-8%. While these numbers in non-recessionary times might be greeted with fleeing investors, Lowe's earnings were greeted with market excitement, at least for a day.

Same thing with its competitor Home Depot, with its first-quarter earnings, on an adjusted basis for charges which were included in the 2008 Q1 earnings, hitting $587 million against $697 million in last year's first quarter, or 35 cents per share versus 41 cents. Sales of $16.2 billion were off 9.7%. These are pretty similar numbers to Lowe's, so the market reacted positively because things weren't worse. (When economic data comes out, it can have a marked impact on the currency market. Find out how to profit, read Trading On News Releases.)

When Bad Numbers Are Good?
We've heard this a number of times, the market's reaction to the Lowe's/Home Depot news is to find a glimmer of hope, so that anything even vaguely related to housing, including home improvement or do-it-yourself repairs would be considered on the uptick. However, with yet another disappointing recent housing report, what the market has failed to see is that you can't simply manufacture good news. Housing, if the latest bleak report is any indicator, may not have even hit the valley floor yet, meaning that housing and the economy in general, are not done on the downside. (Learn more in Economic Indicators: Housing Starts.)

Some Are Doing Well
We understand that the market is forward looking, but it tends to be much more willing to look forward for good news than bad. After all, the market wasn't looking forward to the credit crisis, and didn't see the crisis until it sat squarely on Lehman Brothers, so the market too often keeps looking for good things when there are real indications otherwise.

There are pockets of good news, however slight, and flickers of hope on the horizon. Tractor Supply (Nasdaq:TSCO), the store for rural do-it-yourselfers, has had terrific recent quarters and has been a rarity: a company doing well with its stock doing likewise. Lowe's and Home Depot have been buffeted around by the bad housing related events, but have not been nimble enough to find a way to get consumers into their stores to spend. Tractor Supply's approach is more focused.

Sears Holdings (Nasdaq:SHLD) is another company with its hard lines, and everything from Craftsman tools to patio chairs to washing machines is still finding this recession rocky, but the company's ongoing problems span far beyond the home improvement segment. It had a decent quarterly earnings report, largely due to how bad last year's same quarter was, but is still looking at rough quarters ahead.

How about a more nimble value player in the field, Lumber Liquidators (NYSE:LL)? It provides quality specialty hardwood flooring at value pricing, and in its latest earnings had an earnings per share (EPS) for the first quarter of 19 cents versus 16 cents for last year's same quarter, with a net income of $5.1 million versus $4.3 million last year. So it's a small, niche player, but very effective even in this recession.

Lessons for Lowe's
Lowe's and its retail cousin Home Depot need to learn from what the more successful do-it-yourself retailers, such as Tractor Supply and Lumber Liquidators, have done during this recession. The key is to focus more intently and have some sort of backup plan rather than wishing quarter after quarter, much as Wall Street does, that consumers will come back. At least this might mitigate the worst of the revenue declines and position these retailers to be stronger after a recession. As for this recession, it looks like it will still be a couple of quarters until consumers are going to return to any store, including Lowe's.

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