Home Depot 1Q profit rises, but CEO cautious

Atlanta-based Home Depot beat Wall Street’s profit expectations by earning $514 million, or 30 cents a share, in the first quarter.

But CEO Frank Blake practically greeted the good news with a bucket of ice water, pointing to the big picture in the housing market.

“We are concerned about an accelerated rate of foreclosures,” he told analysts Tuesday. “It provides a cautionary note about predicting a recovery too early.”

In other words, don’t break out the bubbly and say the recession is over just yet, folks.

The markets, in fact, didn’t celebrate. Coupled with a report saying that housing construction tumbled to a record low in April, Home Depot stock seesawed on Tuesday, closing at $24.63, down $1.39.

Blake’s pessimism stems from fears that foreclosures rates in some areas of the country are rising and, in general, economic signals are mixed, at best.

Markets like California, where Home Depot sales improved in the fourth quarter, slipped again because the foreclosure rate shot ever higher, Blake said.

“One out of every 54 households in California is in foreclosure,” he said. “That is the highest it’s ever been.”

As for Georgia, another state with a high foreclosure rate, one in 125 homes are in foreclosure, the company’s chief financial officer, Carol Tome, said, citing data from RealtyTrac.

“But foreclosure rates in Georgia appear to be decelerating,” she added. “But given the mixed signals in the economy, it’s just too early to change our view on how the year is going to play out.”

The company still expects sales to decline 9 percent for the year.

A key metric Home Depot looks at — private fixed residential investment as a percent of gross domestic product — is now at 2.7 percent, well below the previous 60-year low of 3.2 percent, Blake said.

Tome said that metric and company sales are “tightly correlated.”

“Draw a line showing private fixed residential investment going down. Then draw a line of our comp[arable] sales going down. The lines are almost on top each other,” she said.

What does this all mean?

Generally, that people are spending less on their homes.

Big renovations are out and small home maintenance projects are in.

Tome said that big ticket items — or sales above $900 — have dropped 15 percent at The Home Depot, while the number of receipts ringing in at under $50 are flat.

What is sustaining the company is sales of basic repair and maintenance, which “remained resilient across the country,” Craig Menear, executive vice president of merchandising, told analysts. Home Depot also is feeling heat from its main rival, Mooresville, N.C.-based Lowe’s.

Lowe’s top-line sales of $11.8 billion declined 1.5 percent from the first quarter of 2008. Home Depot’s top-line sales of nearly $16.2 billion, registered a 9.7 percent drop.

However, Home Depot’s net profits, or bottom-line, outpaced Lowe’s, improving 44.4 percent to $514 million for the quarter. Lowe’s profits declined by 21.6 percent to $476 million.

Part of the reason is that the two companies have pursued vastly different growth strategies since last year.

Lowe’s is still in a growth spurt, while Home Depot has all but curbed new store construction.

Trying to catch Home Depot in terms of U.S. stores, Lowe’s built 19 outposts last quarter and now has 1,662 U.S. stores. Last quarter, by contrast, Home Depot opened a minuscule five new locations, of which only two were in the United States, giving the chain 1,973 U.S. stores.

Home Depot said last year that its new stores were cannibalizing sales at existing stores, and Tome reiterated that position Tuesday.

“This country is reaching saturation, if it’s not already there,” she said.

Home Depot is focusing on improving customer service, tightly controlling inventory, reducing product theft and loss, and stocking high-profit margin items like paint while minimizing low-profit margin lumber and appliances.

With Memorial Day weekend — Home Depot’s biggest sales weekend of the year — coming up, a lot is still unknown.

“Our biggest selling days are ahead of us,” said Tome. “We’ll know a lot more a week from now than we know today.”