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Home Depot stock sinks
October 12, 2000: 3:38 p.m. ET

Shares plunge after retailer warns it will miss 3Q, 4Q earnings forecasts
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NEW YORK (CNNfn) - Shares of Home Depot Inc., the world's largest home improvement retailer, plunged as much as 28 percent Thursday after it warned it will miss fiscal third- and fourth-quarter earnings forecasts due to rising costs and a drop in lumber and building materials' prices.

Home Depot (HD: Research, Estimates), a component of the Dow Jones industrial average, skidded $13.81 to $35.12 Thursday afternoon. Earlier in the session, the stock dropped as low as $35, its biggest decline since the October 1987 market crash. All told, the company's shares have fallen 29 percent this year, wiping out about $32 billion in market value.

graphicThe reason: Home Depot will not earn what Wall Street thought it would in its third and fourth quarters. The Atlanta-based operator of more than 1,000 home improvement stores said its third-quarter earnings will be about 28 cents a share. Analysts surveyed by First Call had expected the company to earn 31 cents a share; it earned 25 cents a share in the year-ago period.

The news put the retailer in the same camp as rival Lowe's Cos. Inc. (LOW: Research, Estimates), who last week warned that sales from its stores open at least a year would fall short of projections because of lower lumber prices and a drop in sales in a chain it bought last year. Lowe's is the No. 2 U.S. home improvement retailer.

"This is exactly what the (Federal Reserve) hoped for. They wanted to slow consumer spending," said Kenneth Gassman, an analyst with Davenport & Co., who added that the fourth quarter would likely be a tough period for retailers as consumers tuck their checkbooks even deeper into their pockets.

Slower sales anticipated

Projections of that sent shares of other retailers lower Thursday on the heels of Home Depot's warning. Lowe's fell $5.25, or about 13 percent, to $35.81. Wal-Mart Stores Inc. (WMT: Research, Estimates) dropped $2.50 to $42.81, while Best Buy Co. (BBY: Research, Estimates) slipped $5.31 to $43.19.

A year ago, Home Depot became the darling of Wall Street when the gurus at Dow Jones decided to add it to their revised list of venerable Dow 30 stocks. The alteration underscored a general belief that new, large-scale companies were a better reflection of the economy than many of the industrial powerhouses of old -- Home Depot being one of them.

At that time, the U.S. economy was on rails, powered along by ferocious consumer spending that helped propel Home Depot's earnings to successive records. The U.S. economy expanded at an 8.3 percent pace in the fourth quarter of 1999, propelled in large part by strong consumer spending.

But since then, interest rates have risen, oil prices have risen and stock prices have fallen -- all factors that have damped consumers' penchant to spend. Home Depot shares are now worth half of their 52-week high of $70.

Despite all that, the outlook for growth in the home improvement industry remains strong, despite declining prices for lumber and building materials, said Arthur Blank, Home Depot's chief executive. At the same time, "I hardly talk to a supplier who thinks things are not quite as good as they were six months ago. This is not a bad economy, and we don't see it becoming a bad economy. But it is certainly a softer economy."

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All told, lower selling prices for lumber and building materials, along with slower sales, are the main reasons Home Depot opted to recast its third- and fourth-quarter projections. And while sales still are strong, they are not as robust as a year ago, when damage from Hurricane Floyd and concern about Y2K pushed sales of carpeting, flooring and other products well past expectations, Blank said.

Home Depot also said it now expects full-year earnings of $1.16-to-$1.17 a share. Assuming it hits the new 28-cent target for the third quarter, that would give it fourth-quarter earnings of 25-to-26 cents a share rather than the current 31-cents-a-share forecast.

Sales at stores open at least a year, a closely watched retail measure known as same-store sales, are expected to rise 4 percent in the third quarter, rather than the previous guidance of 5-to-7 percent. Home Depot said hurricanes in the third quarter last year and Y2K-related purchases in the fourth quarter make year-to-year sales comparisons difficult.

Full-year expectations lowered

While its current targets may not be met, the company still expects 23-to-25 percent growth in earnings per share next fiscal year. But with the lowered earnings outlook for this year, that would still bring fiscal 2002 earnings to between $1.43-to-$1.46 a share, which would miss the current forecasts of $1.54 a share.

To be sure, some analysts expressed concern that the company's spending on new initiatives, such as its expansion into international markets, might act as a double-edged sword on the company's growth -- particularly in combination with a continued slowdown in consumer spending.

"The challenge they face is that they may get larger and larger and stay at a certain rate of growth," said Mark Mandel, analyst with U.S. brokerage Robinson-Humphrey, who maintained an "outperform" rating on Home Depot.

But Blank told analysts in a conference call Thursday that Home Depot's current profit troubles were strictly related to "the unique pricing situation in lumber and building materials," he said.

Home Depot, operates a total of 1,052 stores in the United States, Canada and South America. It is on track to open another 225 stores next year. Back to top


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