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Home Depot Raises Profit Outlook, Hopes for Housing Market

Tuesday, 14 August 2012 07:03 AM

Cost controls and market share gains helped Home Depot Inc. beat Wall Street's profit estimates for the latest quarter, prompting the No. 1 home improvement chain to raise its earnings outlook for the fiscal year.

The retailer is also seeing improvements in California and Florida, states that were hit hard by the housing downturn, Chief Executive Officer Frank Blake said on Tuesday.

The news boosted Home Depot shares by more than 3 percent to their highest level in 12 years and raised hopes that the company was positioned to outdo rival Lowe's Cos Inc once the housing market and the U.S. economy stabilize further.

"The worst of the (housing) crisis is behind us," said Barclays analyst Alan Rifkin, who added that he was seeing signs of stability in a market that has been in a slump for years.

Groundbreaking on new U.S. homes rose in June, hitting its fastest pace in more than three years, a report showed last month.

For Home Depot, Florida and California were among the best-performing states in the quarter in terms of sales growth at stores open at least a year, Blake said. He termed the improvements "encouraging signs of stabilization in the housing market."

"Housing is now a contributor to GDP growth, rather than a drag," said Blake, who has often been credited for improving Home Depot's merchandise, supply chain and customer service.

U.S. retail sales rose 0.8 percent in July, their first gain in four months, the Commerce Department said on Tuesday. Demand increased for everything from cars to electronics, signaling that consumers could drive faster economic growth in the third quarter.

Home Depot is "executing marvelously" and taking market share from Lowe's with the help of better pricing and customer service, Rifkin said. He said he expected Lowe's to post lower same-store sales growth than Home Depot for the 13th consecutive quarter when it reports its results next week.

Shares of Home Depot rose 3.5 percent to $54.66 on Tuesday after touching a high of $54.71 earlier in the session. At Monday's close, they had climbed more than 26 percent this year.

While the stock trades at a high price-to-earnings multiple, the lofty premium is justified, said analyst Walter Stackow of Manning & Napier, which owns shares in the company.

"You have slow economic growth in general in the U.S., and there's some uncertainty," Stackow said. "What Home Depot offers is earnings growth, high amount of visibility and reasonably high predictability," and it is picking up market share.

Net earnings rose to $1.53 billion, or $1.01 a share, in the second quarter ended on July 29 from $1.36 billion, or 86 cents a share, a year earlier. Analysts were expecting a profit of 97 cents a share, according to Thomson Reuters I/B/E/S.

Home Depot, which cut operating expenses by 2.7 percent to $4.46 billion in the quarter, has benefited from its recent efforts to improve distribution and customer service. It has been quicker than Lowe's to cut costs, and in some cases has gotten a boost as housing markets have rebounded in regions where it has a heavy presence.

A return to more localized marketing and merchandising has also helped Home Depot.


Sales rose 1.7 percent to $20.57 billion, but missed the analysts' average estimate of $20.74 billion.

The company's second quarter is typically the most important selling period for home improvement chains, but unseasonably warm weather early in the year pulled some demand into the first quarter.

In the second quarter, same-store sales rose 2.1 percent globally, including a 2.6 percent increase in the United States.

While Home Depot's results exceeded his estimates, Janney Capital Markets analyst David Strasser said he was less optimistic about same-store sales growth in the back half of the year, citing consumer spending trends.

The company's operating performance remains impressive, but that is largely priced into the stock, Strasser said.

Home Depot said it still expected total fiscal-year sales to rise 4.6 percent. It forecast earnings at $2.95 a share, up from its prior outlook of $2.90.

The company, which has stores in the United States, Canada, Mexico and China, reported a 0.6 percent rise in the number of customer transactions in the second quarter, and their average value increased 1.8 percent to $55.02.

© 2020 Thomson/Reuters. All rights reserved.

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Tuesday, 14 August 2012 07:03 AM
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