Home Depot Profit Rises, but Outlook Weak
Tuesday November 19, 5:11 pm ET
By Karen Jacobs
ATLANTA (Reuters) - Home Depot Inc. (NYSE:HD - News), the world's largest home-improvement retailer, on Tuesday reported a 21 percent rise in quarterly profit as it cut costs, but a weak outlook sent its shares down 13 percent, pressuring the market.
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The company, which is revamping its business as chief rival Lowe's Cos. (NYSE:LOW - News) moves into its most lucrative markets, said it expects earnings for the current quarter to miss Wall Street consensus estimates by 1 cent a share.
Home Depot also said sales for the full year will fall short of longer-term growth goals.
Although profit for the quarter ended Nov. 3 was in line with analysts' average estimate compiled by Thomson First Call, sales at stores open at least a year, a key measure of retail performance, fell 2 percent. In August, Home Depot had forecast a rise of 2 percent to 4 percent in comparable-store sales.
What's more, Chairman Robert Nardelli told a conference call that Home Depot would not meet its longer-term sales growth goal of 15 percent to 18 percent this year. He cited disruptions in customer traffic as the retailer rolls out new assortments in bath hardware, rugs and other categories to give older stores a fresh look.
Home Depot's results contrasted sharply with Lowe's, which on Monday topped Wall Street estimates with a 35-percent increase in third-quarter profit and said fourth-quarter earnings would beat analyst forecasts as a strong housing market lifts sales. Lowe's same-store sales were up 4 percent.
DRAMATIC CHANGE
Analysts said the differing results showed the level of dramatic change under way at Home Depot. The chain has centralized merchandising, consolidated regional divisions, cut full-time payroll, and is overhauling its technology systems to improve profitability.
"You've got one company which is continuing to execute the business plan it's had for years in Lowe's, whereas Home Depot is in a period of repositioning its business," said Midwest Research analyst Eric Bosshard. "As a result, things at Home Depot are getting worse before they get better."
Nardelli, who has focused on cutting costs since he arrived from General Electric Co. (NYSE:GE - News), said the changes were paying off with expanded gross profit margins and better expense control, even as some stores struggle with them.
The operational initiatives "weren't all perfect, but they're moving in the right direction and it sure is better than doing nothing," Nardelli said.
The retailer said sales were hurt partly by lower lumber prices, new product roll-outs and lower sales of energy-efficient windows and doors. It cited a sluggish retail environment and said it remains cautious about the economy into next year.
But much of the sales weakness came from Home Depot's strategy to place several stores in a single market. Chief Financial Officer Carol Tome said Home Depot had cannibalized 22 percent of its stores in the third quarter, hurting same-store sales by an estimated 4 percent.
Some analysts said new Lowe's stores, which get high marks for customer service, are also hurting Home Depot sales.
"It seems logical that Lowe's is putting pressure on them," said analyst Barbara Allen of Arnhold and S. Bleichroeder. She said the areas where Home Depot indicated it was having the most problems with cannibalization -- the West Coast and Northeast -- are major regions Lowe's has entered in the past year.
Atlanta-based Home Depot has over 1,470 stores in the United States, Canada and Mexico, while Lowe's, of Wilkesboro, North Carolina, operates over 800 stores in 43 states.
Home Depot expects the current sales weakness to continue. For the fourth quarter, it forecast a 3 percent to 5 percent drop in same-store sales against a year-earlier rise of 5 percent.
For the third quarter, Home Depot had net income of $940 million, or 40 cents a diluted share, compared with $778 million, or 33 cents a share, a year earlier. Total sales rose 9 percent to $14.5 billion, aided by new stores and strength in appliances, paint and flooring.
The company said it sees earnings of 31 cents a share for the fourth quarter, one cent below the First Call consensus.
Home Depot shares closed down $3.69, or 12.9 percent, at $24.91 and are off more than 50 percent year to date. Lowe's stock, which eased $1.72, or 4.3 percent, to $38.98, has fallen about 15 percent this year. |
