Home Depot Returns to Profit, but 2010 Growth Still Looks Iffy

Home Depot (HD) management told investors it's turned a corner as the hardware chain showed its first quarterly profit growth in more than three years and announced it will hike dividends. But executives issued a conservative outlook for the year, saying housing is not out of the woods yet.The nation's largest home improvement chain reported net income of $342 million during the fourth quarter, compared to a loss of $54 million for the same period a year ago. Earnings per share of 18 cents beat analysts' expectations of 16 cents per share, according to Thomson Reuters' consensus estimate. Net income for the year rose to $2.66 billion, up from $2.26 billion in 2008; earnings per share of $1.57 cents were up 17.2% from 2008.

It was the first year-over-year quarterly profit growth for the chain since the third quarter of 2006. Management announced it will increase the dividend payout by 5%, the first time since 2006, and step up share repurchases as it generates more excess cash. But the company followed that up with a modest outlook for sales and profits growth in 2010.

"We're not expecting a robust recovery," said CFO Carol Tome. Home Depot projects sales growth of 2.5% and earnings growth of 15% for the year. Sales growth will be "flattish" in the first half and pick up in the second half, said Tome.

Those comments mirrored rival Lowe's Cos. (LOW), which reported better-than-expected results on Monday, and also issued conservative guidance to investors.

The housing market has stopped its "dramatic" decline, said Home Depot CEO Frank Blake, but the economy is still fragile. Home Depot's comparable sales were up 1.2% in the fourth quarter, thanks to international sales growth, but were down 1.1% for the U.S. stores. For the year, comparable sales were down 6.6% and down 6.2% in the U.S. alone.

"The housing industry remains at distressed levels ... and our pro customers are still under pressure," Blake said.

Home Depot has seen improvement in big-ticket sales, but sales in areas dominated by contractors and building professionals, such as lumber, remain below average, said Craig Menear, executive vice president of merchandising. Transactions over $900, which make up 20% of sales, were down less than 1% year-over-year in the fourth quarter, compared to double-digit percentage declines in previous quarters. In that price range, there has been strength in areas involved in home repairs, such as appliances, water heaters and windows, as well as installation sales, he said.

Meanwhile, do-it-yourself repairs and small projects continued to grow, as home owners tinker. Home Depot's volume of transactions under $50, which makes up another 20% of sales, rose 3.2% in the fourth quarter, said Menear. Sales are strong in areas involved in simple decor projects, such as ceramic tiles, bath fixtures and paint, he said. The average sale in 2009 was $50.01, down 1.7% from the year before.

Home Depot has been undergoing a renovation of its own over the last three years, trying to upgrade stores and rein in costs. The executives said they are starting to see results in increased customer satisfaction scores and market share.

This year will be a transitional one, said Blake. He admitted the 2010 outlook "doesn't sound very exciting, but we've been waiting for this transition for a long time."
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