20 May, 2008

Home Depot Feeling the Effects of an 'ill consumer'

America's cornerstone home-building-renovating retailer Home Depot (HD) released quarterly earnings numbers pre-market but most of the damage had already been done through lowered expectations as the housing and credit mess in the United States started to spill over into the general economy.

Simple fact: Lots of bad mortgages, and corresponding foreclosures mean that folks aren't likely to go out and buy that circular saw and loads of 2x4s for that 2nd story home extension. Expectations had been lowered tremendously for Home Depot on a year over year basis and the company only grazed by when using typical Wall Street accounting math.

Earnings fell over 60%, from $1Billion to $356Million ($0.21/share) and at the top line, Revenue fell from $18.5Billion to $17.9Billion. While Revenue was generally in line with expectations it took adjustments for Home Depot to match profit expectations. Since expectations were $0.37/share on a non-adjusted basis, HD revealed that it in fact would've had a more profitable quarter if it didn't take a charge for closing stores and filing away plans for future openings. Accounting for these charges, HD would've earned $0.41/share and would have beaten expectations by 4 cents. So why the 5% drop in the stock today? Investors surely can't blame oil's run to $130 a barrel for everything! Well, it's because of the fact that a company like Home Depot, which has an increasingly aggressive competitor in Lowe's (LOW) nipping at its heels, is closing stores (15 in the latest quarter) and putting the kibosh on new store plans (50 stores scrapped).

Investors are certainly spooked enough to think that the housing mess hasn't in fact bottomed and that these home improvement superstores will continue to be under pressure for some time in terms of profitability. So how does Home Depot win back some Wall Street love? By putting its name out there, into the minds of consumers. Yes the housing mess isn't in fact completely behind the market, and yes consumers are increasingly cash strapped due to high gas prices but that doesn't mean the Depot is allowed to sit on its hands and blame the economy.

Management needs to get on that soapbox and come up with some growth strategies beyong the tired "current economic climate is unstable". While all may not be well in the US, a place where Home Depot has almost 2000 of its 2200 some-odd stores, there are plenty of opportunities abroad. The company operates 12 stores in China, and it is very likely that its next wave of growth will significantly be tied to overseas expansion. A roadmap would do wonders to an increasingly skeptical Investment Community. Oh and of course it doesn't help when you shelve almost half of a remaining $22.5Billion share buyback progam.

Disclosure: Author does not own HD, LOW

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