Home Depot improves profit, outlook

By Rachel Tobin Ramos

The Atlanta Journal-Constitution

An economic recovery is under way, according to financial results this week from Home Depot and its rival Lowe's.

Home Depot’s sales and profit were better than expected for the fourth quarter and 2009, the company announced Tuesday. Lowe's announced strong results Monday.

The reports were closely watched for signs of economic recovery. Each company suggested there are still challenges in the housing industry, but the worst seems to be over.

Home Depot, the nation’s third-largest retailer, is forecasting sales will increase 2.5 percent in 2010.

The Atlanta-based company said its results came, in part, from cutting $1.3 billion in costs over two years, and home owners doing small home maintenance and décor projects.

However, Home Depot said its professional customer – which rings up about 30 percent of the company's sales – continues to struggle.

Private fixed residential investment as a percent of GDP – a key metric that Home Depot watches to determine the health of the home improvement industry – still remains well below the 60-year average, chairman and CEO Frank Blake told analysts.

“The economy is not out of the woods yet,” he said. He said called 2010 a transitional year.

“‘Transitional’ doesn’t sound very exciting,” he admitted, “but we have been waiting for this transition for a long time.”

Lowe's and Home Depot appear to be wooing pro-customers with new tactics.

Carol Tomé Home Depot's chief financial officer, told The Atlanta Journal-Constitution in an interview that the chain is experimenting in California with parking areas for pro-customers.

"They love it and it makes them feel special," she said.

Meanwhile, Mooresville, N.C.-based Lowe's has employees in 125 markets dedicated to courting new pro-customers.

In the fourth quarter, Home Depot earned $342 million, or 20 cents per share, on sales of $14.6 billion. That compared to a loss of $54 million or 3 cents a share in the fourth quarter a year earlier. Sales last quarter declined by 0.3 percent.

Home Depot’s quarterly returns bested Wall Street expectations by several cents.

Adjusted earnings were 24 cents a share, which excludes a $163 million write down in its investment in HD Supply [see related story].

For the year, Home Depot sales were $66.2 billion, a 7.2 percent decline from 2008, better than the 9 percent decline the company had forecast.

Annual profit was $2.7 billion, an increase of 17.7 percent. Earnings per share were up 17.2 percent to $1.57.

The company also announced its first increase in the dividend since 2006 and said it plans to buy back shares. Still, housing could remain problematic.

“The housing industry remains at distressed levels, mortgage defaults continue to increase, unemployment remains high and our pro-customers are still under pressure,” Blake said.

Tomé noted the company is preparing for its busy spring planting season. She thinks gardening will continue its popularity streak. One item she likes is a 4-foot-by-4-foot planting bed for $69.97.

Toon van Beeck, a Jersey City, N.J.-based senior analyst with IBISWorld Inc., said it appears Home Depot is making gains on Lowe’s.

Sales at Home Depot stores open more than a year – a key metric used to determine a retailer's health – were down only 1.1 percent at its U.S. stores, while sales dropped 1.8 percent at Lowe's U.S. stores.

Lowe’s turned in a good earnings report on Monday, with fourth quarter profit of $205 million, a 26.5 percent increase, on sales of $10.2 billion. Annual sales declined 2.1 percent to $47.2 billion.

“It’s been a bit of a head-to-head race over the past two years, with Lowe’s capturing a lot of market share from Home Depot,” van Beeck said. “But that’s shifted over the last few quarters toward Home Depot.”

Home Depot’s stores became more customer-friendly and the company improved its profit margin, he said.

“That shift has helped Home Depot have a bit more momentum over Lowe’s,” van Beeck said. “It’ll be quite interesting to see what impact the Martha Stewart products [many hitting Home Depot stores in March], will have.”