Two issues stick out here:
1) Home Depot remodeled their floor segment, and that is likely posing a stiff competitive challenge to LL; and
2) Overall, housing and remodeling, after seeing significant gains last year, are not seeing big follow-through.
Remember, last year was the year of the big cyclical asset recovery: everyone was buying home builders, remodelers, and building material companies. This year? Not so much. Why not? Because housing prices are not up as much, which means the supply/demand equation is more in balance. All those numbers peaked a year ago. The hope was that they would take off again, but so far gains have been modest.
On a smaller scale, we are seeing the same issue play out with Tractor Supply, which sells farm and ranch products to retail customers. After the close yesterday, they reported second quarter same store sales up 1.9 percent, well below expectations of a gain of 3.3 percent. They still believe weather may be an issue, yet full year guidance, is at the low end of the consensus of $2.61.
You can see this concern over the fizzling of the remodeling boom. Last year, LL's earnings were up 65 percent from the year before. Was that sustainable? The jury's still out but right now, they are saying earnings will be flat with last year, which was $2.65—$3.00.
Last year, Tractor Supply grew earnings by 22 percent. Now they're saying earnings will fall short of 2013. That's still growth, but it's only roughly 10 percent.
This has big implications for the larger companies like Lowes and Home Depot. Last year, Lowe's grew earnings 23 percent. This year, the consensus is for another gain of 21 percent. Think they can do that? Maybe. They do have an active buyback program, and are expected to spend something like $3.4 billion it. Despite all this, Lowe's stock is down this morning.
What retailers need now are the following:
1) an improvement in household formations;
2) wage gains;
3) continuing increases in home prices, and
4) fewer stores and a less competitive environment.