Home > Stock Analysis

Consumer Contagion Spreads To Home Depot

Posted: Aug 21, 2008 11:10 AM by Eric Fox

Tickers in this Article: PERY, ANN, LOW, HD

Home Depot (NYSE:HD) reported a decline of 12.3% in earnings per share over the same period last year, as the giant home improvement chain continues to be hurt by the housing downturn and cautious spending by the consumer.

Get Free Stock Analysis By Email

The company reported earnings per share of 71 cents and sales of $21 billion in the second quarter. Same-store sales were down 7.2% after adjusting for a calendar shift due to an extra week in its fiscal year. Analysts were expecting EPS of 61 cents on sales of $20.5 billion. (Discover how financial reports can explain a company's health in Advanced Financial Statement Analysis.)

Mirror, Mirror
The results were almost a mirror image of competitor Lowe's (NYSE:LOW). Lowe's beat expectations when they reported a day earlier. Home Depot also beat analyst estimates on earnings and sales, but unlike Lowe's, Home Depot did not raise guidance for the full year.

The company did join Lowe's by providing a pessimistic outlook on the consumer and macro environment for the balance of the year. Frank Blake, chairman and CEO, said that Home Depot saw continued "pressures on the consumer from constriction of credit availability and increased costs of basic goods".

Conference Call Details
During the conference call, Home Depot management provided more detail on its own operations and on the difficult retail environment facing the home improvement industry. Its spending as a percent of GDP is at 3.5%, compared to the historical average of 4.75%. Only 7.5% of its top 40 markets had positive comparable store sales (comps) in the second quarter. While this is certainly a weak performance, in the first quarter of 2008, none of its top 40 markets had positive comps. (To learn more, read Conference Call Basics.)

Home Depot's international operations were a bright sign in the quarter, with both China and Mexico showing double-digit positive comps. The international division is only 11% of Home Depot's store base, so it was not enough to impact the overall company.

Big-ticket items above $600 saw double-digit declines in sales, and California and Florida had double-digit declines in comps. This was similar to what Lowe's reported.

Management quantified the impact of the government stimulus package at roughly $300 million in extra revenue. Inflation in raw materials was a problem as the company faced cost pressure in products that are metal and petroleum based. Vendor price increases was also an issue during the quarter, as the company suppliers tried to pass on its own rising costs to the retailer.

Home Depot focused on expense control during the quarter and trimmed its full year capital expenditures to $3.0 billion from $3.2 billion by stretching out its planned new store openings.

Bottom Line
Home Depot is facing similar issues to its competitors and other large retailers as spending by Americans wilts under the harsh reality of a declining economy and rising food and energy prices.

There aren't any other large publicly traded home improvement chains due to report earnings soon, so investors will be unable to determine if the pressures facing Home Depot are abating. Several specialty retailers report earnings over the next week, including AnnTaylor Stores (NYSE:ANN) and Perry Ellis (Nasdaq:PERY), both expected on August 22, and while these companies businesses are very different from those of Home Depot, the results will still give clues on the health of the American consumer.

Discover how consumer behavior affects this industry in Using Consumer Spending As A Market Indicator.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS