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Lowe's wows the Street, but home builder crunch time is near

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Lowe's earnings of 88 cents per share blew past Wall Street expectations of 79 cents. Same store sales were up 9.6 percent, the strongest quarterly comp since the first quarter of 2004, was not far from Home Depot's 10.7 percent gain.

Much has been made recently of the "gap" between LOW and HD comp store sales, but that gap is narrowing.

Lowe's full year guidance was raised to $2.10 from $2.05, and same store sales for the full year were raised to 4.5 percent from 3.5 percent. One point: the company has a fairly aggressive buyback program. For example, they generated roughly $2.2 billion in free cash flow last quarter; of that, $1.2 billion was used for buybacks while an additional $174 million was paid in dividends. That aggressive program helps a lot with the bottom line.

Is this the top for home improvement? It wasn't lost on anyone that Home Depot traded down yesterday on great numbers, even as other retailers were generally up.

As with HD, Lowe's valuations are stretched: they are about 20 times forward earnings, and this remains a stock that is still perceived to be interest rate sensitive.

And there's the rub: earnings may well hold up through the year, but valuations may not!

Elsewhere

1) It may be summer, but now is the winter of discontent for retailers. Consider what's happened in the last week, as the retail body count has stacked up in alarming fashion:

a) Today, Staples guided lower for the full year;

b) American Eagle reported earnings of ten cents, no surprise since they pre-announced on August 6th. Third quarter guidance of 14- 16 cents per share is well short of the 35 cent estimate. In CEO Robert Hanson's words: "...we faced a highly promotional and competitive retail landscape and a decline in traffic, which have continued into the third quarter;"

b) Dick's Sporting Goods had lower guidance for the third quarter;

c) Nordstrom last week said full year would be below consensus;

d) Kohls guided lower on their Q3 last year;

d) Macy's guided lower on their full year last week, and

f) Aeropostale said sales were weak.

And yet HD and LOW had great sales increases as consumers spent on big ticket items like flooring and kitchen appliances. There is clearly some shift in spending going on, away from apparel and to refurbishing.

Some of this can be attributed to the fairly weak jobs growth. Staples, for example, missed on top and bottom line; lack of full time job growth has been cited as one reason a business like office supplies is not growing. The Wall Street Journal noted that 75 percent of all jobs being created are part-time.

TJX, so far, is the lone positive among apparel retailers. Be interesting to see what Ross Stores has to say when they report tomorrow, Gap reports after the close as well.

2) Toll Brothers reported earnings of 26 cents per share, in line with consensus, but revenues of $689 million were below estimates of $695 million. New orders were up 26 percent. Deliveries of homes for the full year was narrowed to 3,925 – 4,125 units from 3,850 – 4,200 last quarter.

CEO Douglas C. Yearley said: "Sales volumes and pricing power both increased this quarter from one year ago, a pattern consistent with recent quarters. We believe the recovery is real and we are in the early stages of the rebound."

By CNBC's Bob Pisani

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

Wall Street