Defiant Home Depot = worried investors
Analysts bash home improvement retailer's decision not to report crucial sales numbers going forward; shares see red on Wall Street.
By Parija Bhatnagar, staff writer

NEW YORK ( - Retail analysts said Tuesday that Home Depot's decision to stop reporting quarterly sales was "curious," "strange," "irresponsible" and "highly suspect."

Investors seemed to agree, sending the retailer's shares down more than 4 percent on Wall Street.

"This is a terrible way to do business," said George Whalin, CEO of Retail Management Consultants. "This is a publicly traded company with thousands of investors. Same-store sales are a key measure of evaluating how a retailer is doing. It's dishonest and irresponsible for Home Depot to withhold this information from its stock holders. It gives the perception that the company has something to hide from the financial community."

In a note to clients Tuesday, Goldman Sachs analyst Matthew Fassler predicted that Home Depot's decision to stop disclosing comparable-store sales trends "will likely capture almost as much focus as the results themselves."

That was proving to be true. Atlanta-based Home Depot (Research), the No. 1 home improvement retailer, reported second-quarter profit that beat Wall Street's estimates on strong overall sales.

So why was the stock seeing red?

Observers said it's troubling that Home Depot's decision coincided with softer than expected retail sales during the quarter.

"We dislike any decision to reduce transparency, particularly one executed in a quarter when the measure in question most likely shows poorly," Fassler said. "We can only surmise that [the decision] reflects a reality that this measure does - and will - reflect poorly on the firm vs. competitors."

Same-store sales: Big deal or not?

Same-store sales are defined as sales at a company's retail stores open for at least a year. It's one of the most common and long-standing metrics of gauging a retailer's performance.

Ken Perkins, retail analyst and president of research firm Retail Metrics, said he's not aware of any other retailer that used to report same-store sales and suddenly decided not to. Retailers such as Wal-Mart (Research) andTarget (Research) did stop reporting these numbers on a weekly basis, but continue to report monthly same-store sales.

Home Depot used to report only quarterly same-store sales numbers.

"It's curious that of all the metrics that they could have withheld, they chose this one," said Perkins. "Same-store sales are a good measure of a company's organic growth. They show how well or nor a company is doing because new stores tend to be big sales generators."

In an earnings call with analysts, Home Depot executives said it took the decision for the purpose of "comparability."

But Home Depot's explanation didn't make sense to Perkins or to Morningstar analyst Anthony Chukumba.

"Their reason is suspect," Chukumba said. "This is just going to make it harder for analysts to figure out the health of Home Depot's business."

As an alternative, Chukumba said analysts could make an assumption on Home Depot's sales going forward based on average quarterly change in customer traffic trends and the average ticket.

"That's essentially what same-store sales measure. But this calculation won't be precise and the company is just giving more work to do to analysts," he said.

Could Wal-Mart be next?

Wal-Mart executives have repeatedly said that they would prefer Wall Street not focus so intently on its same-store sales - which have slowed significantly as the company saturates its domestic market - and instead look at its total sales which have been growing at a double-digit percentage on an annual basis.

Whalin thinks it will be a big mistake for Wal-Mart to follow Home Depot's example.

"Total sales aren't a key measure of success if your sales are up simply because you're opening more stores," Whalin said. "There a small portion of retailers who maybe think that same-store sales aren't important to use to evaluate them. I say it does give a sense about how the business is really doing. It's every bit as important as the profit number.

"If a retailer's same-store sales are growing along with its profits, it means it's a successful company," Whalin added.

Some observers did offer a contrary take on the issue and even suggested that Wall Street might be overreacting to Home Depot's move.

"Same-store sales are more important for department stores and discounters whose business is more cyclical than Home Depot's," said Burt Flickinger, an independent retail analyst."

"I think Home Depot's actions can be worrisome in that this metric is a very good barometer that shows not only whose business is growing but also who's contracting," Flickinger said.

Home Depot's profits were up 19 percent in the quarter and sales rose 13 percent, the company said.

Said Flickinger, "Home Depot is growing its business base. It's trying to appeal more to women shoppers and going after the professional market." Without its same-store sales, Flickinger said he would probably now look at other metrics such as sales productivity per square foot, gross margins, litigation liability to evaluate Home Depot.

"Home Depot is trying to transform itself into a bigger and better retailer and grow sales," said Marshal Cohen with market research firm NPD Group. "It's challenged by a lot of obstacles along the way, and I can understand that the company doesn't want to be pre-judged on its sales numbers while it makes those changes."

Wal-Mart spokesman Marty Heires said the retailer was not at present considering to stop announcing its monthly same-store sales.

Home Depot could not immediately be reached for comment.


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