Home Depot beats expectations in 3Q, but keeps its sights low for now

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It looks like the weak housing market will keep hammering home improvement retailers for a while. Even while reporting earnings that beat Wall Street's expectations, Home Depot (HD) warned that it sees no short-term improvement in the housing market to boost its sales in the near future.

The largest home improvement retailer reported net income in the third quarter dropped 8.9% below the same time last year to $689 million, or 41 cents per share, which beat Wall Street's estimate by a nickel. Sales were down 8% and comparable sales were down 6.9%, led by a 7.1% drop in U.S. stores.

Sales dropped, even while traffic was relatively flat, because the average purchase fell 7.1% to $51.80 per customer, or 6.4% on a comparable basis.

Homeowners making own repairs

That decrease reflects the continued weakness in contractor business and large projects, which are still a troubled part of the business, said CEO Frank Blake. By comparison, transactions under $50, which make up 20% of sales, grew 2% during the quarter, said Craig Menear, executive VP of merchandising.

Sales of items for do-it-yourself and small projects and energy-saving items are going strong, however, as homeowners patch up their homes themselves, noted Menear. Among the categories that did better than average were paint, plumbing, flooring, and gardening. Meanwhile, categories dominated by professional contractors, such as lumber and concrete, had sales below average, he said.

Last year's totals got a bump from hurricane-related sales in the Gulf Coast markets, that added nearly $125 million to September sales and pushed up traffic last year, noted CFO Carol Tome. Additionally, total traffic for last year was based on an additional 26 stores that have since closed. She noted Home Depot expects improvement in comparable-store sales in the fourth quarter, showing a drop in the low to mid single-digit percentages.

Home Depot held to its forecast that full-year sales will drop 9% below last year's, but raised its profit estimate, thanks to cost-cutting that has helped increase its profit margins. It now expects earnings for the year to drop 13%, better than the 15% to 20% drop it had forecast when it reported its first-half results in August.

Housing market remains a problem

That was still a far sight better than rival Lowe's Cos. (LOW), which just a day earlier reported a 29.5% drop in earnings for the same period. But Home Depot executives agreed with Lowe's that housing remains a problem, even as they pointed out faint signs that the market may be nearing a bottom.

Blake said the company has seen stabilization in sales among markets that experienced the earliest signs of the housing bust, such as California, Florida and Arizona. That mirrored comments made a day earlier by his counterpart at Lowe's.

But Home Depot's executives said it is too hard to get a read on which markets are ready to bottom or turn because even within states some regions are doing better than others. Blake noted that in California, there is more stability in San Diego than Los Angeles. He also noted that he would have expected to see lower sales in the Midwest region, where unemployment is higher than the norm, but sales are holding up well there.

Recent statistics show the rate of housing investment as a percentage of GDP has stopped dropping, said Blake. But while it's an encouraging indicator, he warned it's not a sign that business is going to take off yet, since it's still down almost 20%. Additionally, there are issues of consumer confidence and unemployment rates that have to be factored in, he said.

"We're still in 'less bad' territory," Blake said. "We've got some additional issues with the consumer base that we're going to have to deal with as well."

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