For Immediate Release
Chicago, IL – August 26, 2010 – Zacks.com Analyst Blog features: D.R. Horton (DHI), Weyerhaeuser (WY), USG (USG), Fortune Brands (FO) and American Eagle Outfitters Inc. (AEO ).
Here are highlights from Wednesday’s Analyst Blog:
Worst New Home Sales EVER!
New Home Sales fell by 12.4% in July to a seasonally adjusted annual rate of just 276,000. That is a new record low for the data that stretches all the way back to the early 1960’s.
The previous record low had been set in May at 281,000. Relative to a year ago, sales are down 32.4% from a 408,000 annual pace. And a year ago was not exactly the best of time for the nation’s homebuilders. The peak of new home sales during the housing bubble was a 1.389 annual rate set in July 2005, so we are down over 80% from the peak.
The revisions to prior months were, on balance, a wash. The June pace was revised down from a 330,000 pace to just 315,000. May, on the other hand, was revised up from 267,000 to a 281,000 pace.
Inventories were flat relative to June at 210,000, but that is down 25.0% from the 270,000 new houses that were on the market a year ago. Builders have done a good job in controlling their inventories, but they have not been able to ramp things down as fast as sales have deteriorated. The months of supply shot up to 9.1 months from 8.0 months in June, and from 7.9 months a year ago.
That is not a comfortable position for the home builders to be in. This is, after all, very expensive inventory to carry on your balance sheet. Of course, in this environment, controlling your inventory simply means building fewer houses.
In addition to building fewer houses, it looks like they are building smaller houses as well, or at least less expensive homes. The median price for a new home fell 6.0% on the month to $204,000 and is down 4.8% from a year ago. The average price fell 5.2% to $235,300 and is down 13.2% from a year ago.
Bad News by Region
Part of the decline in the average price can be traced to the regional variation in how fast new home sales are dropping. Worst hit by far this month was the West, where sales plunged 24.4% for the month and are off 54.6% year over year. Next worst hit was the Northeast, with a 13.9% decline for the month and off 24.2% year over year.
Housing tends to be most expensive in the Northeast and West, and relatively cheap in the Midwest and South. Sales fell “only” 8.3% in the Midwest for the month, and are down 21.4% year over year. Sales in the South were down 8.7% from June and down 26.6% from a year ago.
Not all the regions though have equal importance. The South is by far the biggest, and thus the most important. In July, 56.9% of all new home sales were in the South and just 11.2% were in the Northeast.
Can't Blame the Tax Credit
New home sales are recorded when the contract is signed, not at closing, as is the case with existing home sales. Thus the immediate hangover from the end of the homebuyer tax credit was felt in May, and we should be getting over that effect by now. This was just plain a dismal number and one that really cannot be explained away by special factors.
The Economic Impact of New Home Sales
It is hard to overstate just how important new home sales are to the overall economy. Each new home built generates a huge amount of economic activity.
It is not just the homebuilders like D.R. Horton (DHI) that are affected. For starters, think of the amount of material that goes into building a house. Each house uses a lot of lumber from the likes of Weyerhaeuser (WY). To build a new house you need sheet rock from USG (USG) and plumbing fixtures from firms like Fortune Brands (FO).
Thus when houses get built, it is not just the carpenters, electricians and roofers that go to work, but that work also leads to lots of jobs for lumberjacks, as well as many factory jobs. Given that building supplies tend to be heavy, most of them are still made here in the U.S. rather than imported.
Existing home sales, by comparison, generate almost no new economic activity, and are only important in so far as they give clues to the future direction of housing prices. As the principal store of wealth for most Americans, the value of existing homes is vitally important. The level of turnover is significant only in relation to the number of houses that are up for sale. Yesterday, the news on that front was just plain awful.
American Eagle Surges on Earnings
American Eagle Outfitters Inc.'s (AEO ) fiscal 2010 second-quarter adjusted earnings slipped to 13 cents per share from the year-ago earnings of 18 cents, but edged past the Zacks Consensus Estimate of 12 cents. The adjusted quarterly earnings excluded a loss of 8 cents per share on American Eagle’s underperforming Martin+Osa chain. The company completed the closure of 28 stores and the online business of Martin+Osa in the second quarter.
During the quarter, American Eagle’s net sales edged up 0.7% year-over-year to $651.5 million, but missed the Zacks Consensus Estimate of $660.0 million. The slight increase in sales was mainly attributable to the opening of new stores, partially offset by a 1% year-over-year decline in same-store sales. In the reported quarter, American Eagle opened 11, remodeled 10 and closed 33 stores, including the Martin+Osa chain.
American Eagle’s gross profit fell 5.6% year-over-year to $239.7 million, while gross margin contracted 250 basis points (bps) to 36.8%. The reduction was mainly caused by higher markdowns coupled with the de-leveraging impact of lower same-store sales on fixed expenses.
Selling, general and administrative expenses, as a percentage of sales, rose 50 bps year-over-year to 25.4% due to the timing of contract-based equity grants and severance payments. Consequently, operating income declined 36.0% year-over-year to $38.2 million, while operating margin slipped 340 bps to 5.9%.
American Eagle ended the quarter with cash and cash equivalents of $425.5 million, compared to $500.3 million in the year-ago period. During the first half of the current fiscal year, the company generated $21.9 million of cash from operations and received $27.9 million from sale of investments. The company also utilized $192.3 million of cash towards share buybacks, $39.3 million towards capital expenditure and $30.0 million towards debt repayment.
Moving forward, American Eagle anticipates adjusted earnings in the third quarter of fiscal 2010 to range between 23 cents and 26 cents per share, assuming same-store sales to be flat-to-down in low-single-digits. The guidance is in line with the Zacks Consensus Estimate of 26 cents per share.
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