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State of housing: Homebuilders vs home furnishings

Despite weak housing numbers last month, the housing market has made significant strides in the past few years. After suffering in the years following the financial crisis, housing indicators such as new home sales and housing starts are steadily approaching pre-recession levels. Real estate has always played an important role in the U.S. economy and continues to be an important bellwether for the health of the consumer. It also impacts earnings of construction and home improvement companies. This week we see two companies reporting whose success has been influenced by the status of the housing market.

First up this week, homebuilder Lennar is scheduled to report first quarter earnings tomorrow before the opening bell. After a strong 2014 and even better 2015, Lennar is well positioned to kick off its fiscal 2016 on a good note. Analysts are expecting earnings per share of $0.55 on $1.87 billion in revenue, according Estimize consensus data.


Compared to the same period last year, this predicts as an 11 percent increase on the bottom line while sales are expected to grow 14 percent. Given EPS has beat in each of the past three quarters, it comes as no surprise that Lennar trumps the crowdsourced consensus in 93 percent of reported quarters.

Lennar continues to update its product and revenue mix which has stimulated strong order growth over the past two years. Last quarter, the homebuilder posted an 8 percent positive earnings surprise while reported revenue increased 14 percent on a year-over-year basis. Its ancillary businesses Rialto, Multi-Family and FivePoint have also benefited from the housing recovery and supported Lennar's recent growth. With multiple longer term growth channels in place, the outlook for 2016 appears promising.

Shortly after Lennar, we get fourth quarter results from Restoration Hardware. The upscale housing retailer has fared far worse than its peers in the space, with shares falling 51.9 percent in the last three months and 60 percent over a full year. In a preliminary earnings report, management indicated earnings per share of 99 cents on $647 million in revenue. Still, the crowdsourced community is calling for $1.26 on the bottom line, 7 cents less than Wall Street, and revenue of $703.06 million.


Restoration Hardware's poor preliminary report was severely impacted by out of stock merchandise, poor inventory planning and failure to fulfill orders. Investors are now concerned whether the company can actively pursue long term goals when it can't address the immediate issues. Moreover, William Sonoma's lackluster fourth quarter earnings two weeks ago isn't a positive foreshadowing for RH.

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Restoration Hardware and its peers been unable to reap the rewards of a stronger housing market, reflecting the overall lower demand for upscale furniture and home improvement as consumers become increasingly more value focused. This has helped home improvement retailers with a greater variety of price-points, such as Home Depot, crush their earnings results over the last several quarters.


The good news is that the housing market has reconciled a majority of its losses from seven years ago. For home builders and construction companies this has worked in their favor as witnessed by Lennar's string of success. On the other hand, upscale home improvement companies, like Restoration Hardware, are still out of reach for many Americans despite the upbeat economy.

How do you think these names will report this week? Be included in the Estimize consensus by contributing your estimates here!