Nothing But Hound Dog (HD)

Back when trading was accomplished primarily by guys shouting at each other, the denizens of a trading room had nicknames for many of the most popular stocks.  Mister Softee was Microsoft (MSFT), I-Beam, or simply Beamer, was IBM, and Hound Dog was Home Depot (HD).  I hadn’t thought much about these old monikers until I heard someone refer to HD as one of today’s dogs.  As I write this, the stock is down about -2%, better than its -3.4% opening drop but hardly a market leader.  HD may be a dog of the Dow today (at this moment, Nike (NKE) is actually a bigger drag on that measure today), but it is certainly dampening sentiment throughout the equity market.

Yesterday’s piece focused upon the importance of key retailers like HD and Walmart (WMT) as we wrap up the first quarter earnings season.  We noted that even though a wide range of consumer products manufacturers were able to successfully pass along price increases in their Q1 results, the month  difference in timing between those companies and the retailers could be significant because of the huge drop in consumer sentiment that was revealed last Friday.  It seems clear that things were good through the end of March; we will learn if that started to change in April.

On the surface, HD did OK.  Their reported EPS of $3.82 was 2 cents better than the analysts consensus.  No surprise there – most companies manage to have EPS beat consensus.  (We’ve long asserted that if nothing else, corporate managers may be most adept at managing their analysts’ expectations.)  The problem is that same-store sales fell by 4.5%, which is never a good sign for a retailer. 

The blame fell on bad weather, lower lumber prices, and “more broad-based pressure across the business compared to when we reported fourth quarter results a few months ago.”  That line, from the earnings press release, was an eye-catcher. 

Let’s face it, weather is always a convenient punching bag, and while lower lumber prices are a negative if you sell and inventory lumber, that is a welcome disinflationary (if not deflationary) sign for the economy.  The acknowledgement of business pressure plays right into the concerns that consumers are tightening their purse strings.  That was exactly the concern raised by the University of Michigan sentiment numbers and ratified by a weaker than expected Retail Sales report showing a gain of 0.4% vs. a 0.8% consensus (that said, last month was revised up 0.3% and sub-indices were solid or better). 

Consumers ultimately vote with their wallets, not in sentiment surveys.  The voting at HD was not particularly encouraging.  Remember, an unemployment rate of 3.4% means that the vast majority of people who want a job have one, but while they were willing to treat themselves to some less expensive indulgences last quarter – even if those prices rose – they may be keeping their financial powder dry.  If true, that’s not great for retailers and the economy at large.  But we’ll need to hear it from more than one key seller of hardware.