Home Depot warns on full-year results
Citing slowing housing market, gas price inflation and higher interest rates, nation's No. 2 retailer says sales and earnings gains should be at low-end of earlier guidance.
By Parija B. Kavilanz, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Home improvement retailer Home Depot edged past analysts' forecasts for second-quarter results Tuesday, but warned on its full-year results, citing a challenging second-half of the year.

"As you know the economic indicators are mixed. Unemployment and wage levels look healthy. But discretionary dollars are becoming repair and remodel dollars." CEO Robert Nardelli said during the company's conference call with analysts.

Indeed, retail industry analysts have cautioned that a slowing housing market coupled with gas price inflation would likely hurt home improvement retailers and consumer spending overall.

"Because of a challenging second-half, we're planning conservatively overall but not in our retail business," Nardelli said.

"Home Depot's future is starting to look more like that of other big retailers: store experience, customer service, merchandising, exclusives, and layout," said Richard Hastings, senior retail sector analyst with Bernard Sands.

"With the real estate market certainly slowing down, contractor sales growth at Home Depot could suffer, so the solution would come only from growth in other merchandise and services to existing home owners."

Despite concerns about a slowing spending environment, Nardelli said Home Depot had drawn up an aggressive game plan for capital expenditure investment in the second half.

Investors appeared to applaud the move, with Home Depot (Charts) shares trading higher Tuesday on the New York Stock Exchange.

He said the retailer had earmarked $350 million to improve both "shopping experience" at its stores and adjust to customers' focus on repair and remodeling projects.

These steps include increasing staffing hours in stores, completion of self-checkout in all locations and the introduction of an enhanced 24-hour 1-800-Home, customer service hotline.

The call was monitored via Web cast in New York.

Said Hastings, "Home Depot has the resources to invest into technology and staffing, all of which could impact margins in the short-term while providing opportunities for profitable growth later on. Much of this outcome will depend upon the liquidity of the household sector which is looking increasingly challenged going into 2007.

For the second quarter, Atlanta-based Home Depot earned $1.9 billion, or 93 cents a share, excluding special items, up from $1.8 billion, or 83 cents, a year earlier.

Analysts surveyed by earnings tracker First Call had forecast EPS of 92 cents.

Sales rose 17 percent to $26.03 billion from $22.31 billion a year ago. Sales growth in Home Depot's services segment outpaced overall retail sales. Services sales grew 10 percent to $1 billion in the quarter while retail sales grew 5 percent to $22.6 billion.

Home Depot also reinstated its policy of reporting same-store stales, which is a key retail performance metric that measures sales at stores open at least a year.

The company's same-store sales slipped 0.2 percent in the second quarter. Average sales ticket during the quarter increased by 4.2 percent to $59.98.

Analysts and Home Depot investors were surprised and angered by the retailer's decision to stop reporting same-store sales last quarter. The decision hurt the stock and resulted in harsh criticism and questioning of Nardelli's management style.

For the full year, Home Depot said it now expects sales and earnings to be at the low-end of its guidance and same-store sales to be fault or slightly negative in the second-half of the year.

The company said in January that full-year sales would grow 14 to 17 percent and its earnings per share 10 to 14 percent.

First Call now forecasts full-year EPS of $3.04, which would be a 12 percent gain.

The nation's No. 2 retailer also reported it has received certain lawsuits related to its stock option procedures, and that its board of directors will conduct a review of its historical stock option practices.

The company had previously disclosed that the Securities and Exchange Commission is reviewing its options practices.

Home Depot repurchased 58 million shares in the second quarter. Since 2002, the company has repurchased 349 million, or approximately 17 percent, of its outstanding shares.

Wal-Mart's profit down. Top of page

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