Tough economy takes toll on Home Depot

Home Depot, operating amid one of the most dismal retail environments in decades, announced Tuesday that third-quarter earnings slid 30.7 percent.

Despite the tough conditions, the Atlanta-based company —- the largest home improvement chain in the world —- was still profitable.

Home Depot posted net profits of $756 million, or 45 cents per diluted share, compared to $1.09 billion in the third quarter last year, or 60 cents per diluted share.

The performance beat analyst expectations by 7 cents a share.

Home Depot wasn’t alone in posting sales declines in the third quarter. And many retailers have predicted double-digit declines in Christmas sales, normally when retailers make their profits for the year.

Home Depot’s big quarter is usually in the spring with the start of home improvement projects.

“Many retailers live and die by what they sell at Christmas,” Home Depot Chief Financial Officer Carol Tome said in a phone interview with The Atlanta Journal-Constitution on Tuesday. “That’s not our case, thank goodness. I never thought I’d see anything like this, ever.”

Last year, only 0.3 percent of Home Depot’s annual sales came from holiday decor (though that doesn’t include Christmas gifts, she said). “I don’t think there’s anything to suggest it’s going to get better by spring.”

Retailers are united in fingering the culprits for sluggish sales: a bad housing market, frozen credit markets, layoffs, a volatile stock market and spooked consumers.

On Monday, Minneapolis-based Target and Mooresville, N.C.-based Lowe’s reported profits declined more than 20 percent. Wal-Mart has been the exception: The nation’s largest retailer posted a 7.5 percent increase in profits for the third quarter. The company’s Bentonville, Ark.-based executives said it was because of their low prices.

Short of giving products away, retailers are finding it hard to get consumers into their stores.

Home Depot has slashed prices on more than 1,000 items. Wayne Hood, an analyst for BMO Capital Markets in Atlanta, said he’d like to see prices cut even deeper to spur sales volume.

“You could argue that you could continue to drive those margins and offer consumers even lower prices to try to stimulate greater volume,” Hood said.

Home improvement retailers face their own unique problems —-home remodels have stagnated in the midst of the credit crunch.

And sales of big-ticket items, like appliances, have seen double-digit declines at Home Depot.

Nonetheless, analysts were impressed with Home Depot’s profits given the tough economy and housing market.

Hood said he’s not worried about credit downgrades or default risks for Home Depot as he is with other retailers. Home Depot ended the quarter with $874 million in cash and no outstanding commercial paper, Tome said. Home Depot has approximately $11 billion of long-term debt, of which $1.7 billion comes due in 2009.

“The situation isn’t a dire one,” agreed senior analyst Joseph Magyer with The Motley Fool in Alexandria, Va.

“I think they will turn both the business and shares in a big way once the economy turns,” he said.

Home Depot’s sales for the third quarter totaled $17.79 billion, a 6.2 percent decrease from the third quarter last year, reflecting negative same-store sales of 8.3 percent.

Home Depot says that given the softness in the housing and home improvement markets, “as well as negative macro-economic conditions,” sales for fiscal 2008 could be down as much as 8 percent. Previous estimates were 5 percent.

Earnings per share for the year could decline by 24 percent, the company estimated.

Missing from Home Depot’s discussion on Tuesday was when the housing sector may hit bottom.

“I suspect we didn’t talk about it because it’s so uncertain,” said Tome.

PERFORMANCE HIGHLIGHTS

> Revenue declined 6.2 percent to $17.79 billion and earnings declined 30.7 percent to $756 million.

> Kitchen remodels were down 30 percent.

> Of all Home Depot categories, only building materials —- specifically roofing and insulation —- saw sales rise.

> Same-store sales declined in Canada and China, while sales in Mexico increased.