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Home Depot blames housing for falling profit

Home Depot Inc. Tuesday reported lower third-quarter profit that missed Wall Street estimates and sharply cut its forecast for earnings and sales growth this year as the U.S. housing slowdown crimps spending.
/ Source: Reuters

Home Depot doesn’t yet see light at the end of the tunnel. It said the slumping housing market that cut into its third-quarter profit is expected to continue into 2007, forcing the nation’s largest home improvement chain to consider altering its long-term growth projections.

The Home Depot Inc. reported a 3.1 percent drop Tuesday in profit for the quarter ending Oct. 29. It lowered its earnings per share growth guidance for the year.

Chief Financial Officer Carol Tome said the Atlanta-based company has no plans to change its strategy.

“Some companies in times like this would pull back, but we won’t,” Tome said in an interview.

Home Depot said it earned $1.49 billion, or 73 cents a share, in the third quarter, compared with a profit of $1.54 billion, or 72 cents a share, for the same period a year ago.

Analysts surveyed by Thomson Financial were expecting earnings of 75 cents a share.

Revenue in the quarter rose 11.3 percent to $23.09 billion, compared with $20.74 billion for the same period a year ago.

But same-store sales — a key industry metric that measures sales at stores open at least a year — fell 5.1 percent in the quarter, Home Depot said.

“It was actually more challenging than we anticipated,” Chief Executive Bob Nardelli said of the third quarter in a conference call with analysts.

The company blamed a slowing economy, declining home prices and slowing housing turnover. An absence of major hurricanes to hit the U.S. this season and softness in several product categories, including kitchens and windows, also were to blame, said Craig Menear, Home Depot’s senior vice president of merchandising.

Nardelli said the housing market hasn’t hit bottom yet, which could spell trouble for Home Depot.

“And I don’t see anything that says it’s going to get significantly better in ’07,” Nardelli said.

He said the company may have to re-evaluate its long-term growth projections through 2010, depending on when the market recovers. The company had said in January that it expected annual earnings-per-share growth in the range of 10 percent to 14 percent from 2006 to 2010, coupled with annual sales growth over the next five years of 9 percent to 12 percent.

The tide has shifted since that rosy projection.

In the fourth-quarter of this year, Home Depot now expects its earnings per share will decline by as much as 12 percent to 16 percent compared to last year, Tome said. Same-store sales will decline in the mid-single digits in the fourth quarter, Tome said.

For the full year, Home Depot said it believes its fiscal 2006 earnings per share will grow 4 percent to 5 percent over fiscal 2005 and that sales will grow for the year by about 12 percent. It had earlier projected earnings per share growth for the year to be on the low end of a range of 10 percent to 14 percent and sales growth for the year to be on the low end of a range of 14 percent to 17 percent.

A bright spot in the third quarter was growth in the company’s Home Depot Supply business. Sales in Home Depot Supply more than doubled to $3.5 billion. The company said it also gained market share in several categories, including tractors and patio furniture.

For the first nine months of the year, Home Depot said it earned $4.84 billion, or $2.32 a share, compared with a profit of $4.55 billion, or $2.11 a share, for the same period a year ago. Nine-month revenue rose 13.8 percent to $70.57 billion, compared with $62.02 billion recorded in the same period a year ago.

Home Depot is reinvesting in its stores as part of an effort to spur sales. It also realigned its executive structure to try to improve its performance.

The company also said it continues to cooperate with a Securities and Exchange Commission inquiry into its stock option practices. Federal prosecutors in New York also have requested information from Home Depot.

The Home Depot ended the quarter with 2,104 stores in the United States, Canada and Mexico.