Home Depot 2Q profit beats expectations

By RACHEL TOBIN RAMOS

The Atlanta Journal-Constitution

Despite the weak economy, Atlanta-based Home Depot made a healthy $1.1 billion profit last quarter.

And they did it while regaining lost ground rival Lowe’s muscled away during the first part of this decade.

Specifically, Home Depot beat analyst expectations for earnings by 8 cents in the second quarter which ended Aug. 2., and raised profit expectations for the year.

Meanwhile, Lowe’s missed its earnings expectations, said it was stalling its new store growth significantly and lowered its profit guidance for the year.

What really cheered up Home Depot CEO Frank Blake, however, was that the number of people ringing purchases at Home Depot’s stores last quarter rose for the first time in two years chainwide. The number was 362 million transactions, a .3 percent increase.

Still, what Home Depot’s and Lowe’s results say about the overall economy remains uncertain.

Blake says he still is concerned about high foreclosure rates. He also doesn’t like the fact private fixed residential investment as a percent of GDP was 2.4 percent last quarter, the lowest level in more than 60 years. This is a key metric Home Depot watches to determine spending on housing.

Home Depot also saw purchases by professional contractors drop to 27 percent of the chain’s overall sales, from 32 percent a year ago.

“We can’t manufacture demand,” said Home Depot CFO Carol Tomé, in an interview with The Atlanta Journal-Constitution. “If there’s no business [for the professional contractor], we can’t make the sales happen.”

Home Depot’s net earnings for the second quarter were $1.1 billion on sales of $19.1 billion. Profits dipped 7.2 percent from the same quarter a year ago. Home Depot’s per share profits were 66 cents, from 71 cents a year ago.

Two things affected earnings in the second quarter: a $20-million charge from closing Expo design centers and a $50-million boost from a favorable foreign tax settlement.

Though Home Depot’s same store sales declined 8.5 percent for the quarter, at Lowe’s they declined even further to 9.5 percent for the quarter.

Mooresville, N.C.-based Lowe’s posted a $759 million profit on sales of $13.8 billion. Profits declined 19.1 percent compared to the second quarter of 2008. For the year, Lowe’s expects total sales to decline 3 percent.

The two home improvement chains are watching confusing economic indicators. Overall, housing starts were down 1 percent in July, but construction of single-family homes rose for the fifth month. Yet foreclosures continued to rise in certain areas.

Blake told analysts that “caution is appropriate.”

Lowe’s CEO Robert Niblock blamed his company’s worse-than-expected returns on “wavering consumer confidence, unseasonable weather ... and restrained consumer spending compared to last year’s fiscal stimulus-aided results.”

Still, Niblock said in a statement there are “indications that a bottoming process in housing and the broader economy is under way.”

Despite the weather and the economy, the battle to be the best home improvement retailer goes on.

Analysts seemed to think Home Depot has finally been making the right moves, after years of building a huge wholesale division, HD Supply, and wooing chi-chi designers to Expo Design Centers, divisions Blake sold or closed.

Analyst Peter S. Benedict with Baird Retail Research, kept his “outperform” rating for Home Depot’s stock.

“While trends in the housing market will remain the dominant force influencing Home Depot’s fundamental performance,” he wrote in a note, “we believe management is pulling the right levers to position the company to emerge from the current downturn a leaner, stronger and more profitable organization.”

Home Depot shares closed Tuesday at $26.93, an 82 cent gain, or 3.14 percent.

Lowe’s shares closed lost 48 cents, to close down 2.34 percent at $19.99.