Home Depot earnings hammered

World's largest home improvement store chain posts 66% drop in profit amid housing slump.

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By Catherine Clifford, CNNMoney.com staff writer

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Home Depot profits tumbled 66% in the first quarter, due to costs associated with closing 15 stores and eliminating 50 future stores from the pipeline.

NEW YORK (CNNMoney.com) -- Home Depot posted a 66% drop in quarterly profit Tuesday, as it paid to close stores and cut back on expansion plans amid the housing slump, although the results topped analysts' forecasts.

The world's largest home improvement retailer said its net income fell to $356 million, or 21 cents per share, from $1.05 billion, or 53 cents per share, in the year-earlier period.

Excluding one-time expenses of $543 million involved in the closing of 15 stores, Home Depot (HD, Fortune 500) reported profit of $697 million, or 41 cents a share.

Analysts surveyed by Thomson Financial had been looking for earnings of 37 cents per share on that basis.

Sales fell 3.4% to $17.9 billion, but narrowly beat Wall Street's expectations for revenue of $17.6 billion.

"The housing and home improvement markets remained difficult in the first quarter; in fact, conditions worsened in many areas of the country," said Frank Blake, chairman and CEO, in a statement.

Home Depot not only announced plans to close 15 stores during the quarter, but also to remove 50 stores from the future growth pipeline.

Home Depot's sales were boosted by a calendar shift that favored seasonal benefits. The first quarter included the week from April 29 to May 4, which is a strong week in lawn and garden sales, adding $524 million to sales, Home Depot chief financial officer Carol Tomé said in a conference call.

The calendar shift may have boosted the first quarter, but it "will negatively impact the second quarter. They will gain a week in August, which is not as profitable," said Mitchell A. Kaiser, senior research analyst at Piper Jaffray.

Consumers spend less on big-ticket home improvements

The number of customer transactions decreased 1.3% from the year ago period. As home prices slump across the country, fewer people are spending money to renovate their homes, and the improvements that they are making are not as expensive.

The average amount that customers are spending decreased 2.8% in the first quarter. "People are spending on small ticket types of repairs for their homes, not big ticket" renovations, said Wayne L. Hood, analyst for BMO Capital Markets.

Consumers are less likely to spend on expensive bathroom and kitchen renovations because the value of their home is decreasing, according to Kaiser. With gas and food prices increasing, Kaiser said people have less extra income to spend on major home improvements.

"As expected, the significant weakness in the quarter came from continued softness in big ticket and construction departments," said Craig Menear, executive vice president of merchandising, during the conference call. Building materials, electrical and kitchen departments saw the significant declines, according to Menear.

Same-store sales, a gauge of retail health that measures sales at stores open at least a year, decreased 6.5% during the quarter. Excluding the strong first week in May, same-store sales would have been down 9.2% for the quarter, according to Tomé.

Even though consumers aren't renovating their bathrooms, they are planting flowers and getting their lawns ready for the summer season. Chemicals, fertilizers, landscaping goods, seed and lawn decor did well in the first quarter, according to Menear.

Regional strengths and weaknesses

Areas of the country that have been hit hardest by the housing market meltdown have also been weak for Home Depot. "Regionally, in markets where home prices have declined approximately 15%, we are continuing to see negative comps (same store sales)," said Menear.

California and Florida posted especially weak sales, even in the garden sector, which was the only department whose overall sales grew, according to Menear. He said the Ohio Valley and the Southwest region, however, are performing better then the national trend.

International Home Depot stores, including stores in Mexico, Canada and China, are helping to cover some of the company's domestic losses. International stores make up 11% of the company's store base.

Lowe's (LOW, Fortune 500), the second largest home improvement store chain in the country, reported a 17.9% drop in first-quarter earnings on $12 billion in sales on Monday.

Home Depot operates a total of 2,258 retail stores, including 1,970 stores in the United States, 166 in Canada, 69 stores in Mexico and 12 stores in China. Home Depot employs more than 300,000 associates, according to the company.  To top of page

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