Home Depot's Numbers Show Housing's Still in the Basement

In spite of the Obama administration's latest effort to boost the U.S. housing market by extending the first-time homebuyer credit, numbers reported yesterday (Tuesday) by the nation's biggest home-improvement retailer, The Home Depot Inc. (NYSE: HD), indicate it could still be some time before the industry can claw its way out of the basement.

Home Depot reported sales of $16.36 billion for the fiscal quarter ended Nov. 1, down almost 8% from $17.78 billion in the comparable period last fiscal year. That resulted in an 8.9% drop in net income, which fell to $689 million, or 41 cents a share – down from the year-ago figures of $756 million, or 45 cents a share. Same-store sales were down 6.9% corporate-wide, and 7.1% in the United States.

Investors took little solace Atlanta-based Home Depot's third-quarter report, sending the company's shares down 66 cents, or 2.39%, to close at $26.99.

Home Depot's lackluster earnings negatively impacted shares of rival Lowe's Companies Inc. (NYSE: LOW) as well. Lowe's stock sank 26 cents, or 1.2%, to close at $21.48 a share.

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While the per-share earnings were quite a bit better than the pre-report analyst estimates of 36 cents a share – and considerably stronger in relative terms than the numbers reported Monday by Lowe's – the numbers don't necessarily reflect an improvement in housing demand or the home-repair market.

Instead, industry observers said Home Depot managed to partially offset lackluster sales with decisive cost-cutting measures, including freezing executive salaries, eliminating jobs, tightening inventory controls and even reducing energy use in stores. The company has also scaled back expansion plans, closed several "concept" stores and stepped up customer-service efforts in a bid to increase customer loyalty and repeat business.

Home Depot projected fourth-quarter earnings of 12 cents a share, down 25% from the 16 cents a share forecast by analysts surveyed by Thomson Reuters. It also predicted an adjusted full-year profit of just $1.55 a share, down 13% from last year.

"There is still a great deal of pressure in the housing and home-improvement markets," said Home Depot Chairman and Chief Executive Frank Blake.

Blake said that "some positive signs of stabilization" were emerging, but data from the National Association of Home Builders' (NAHB) monthly survey painted a somewhat bleaker picture.

The NAHB's Sentiment Index, which had risen to 19 in September, fell to 18 in October and to 17 this month – though November's number was actually reported as "holding steady" after the original October reading was revised downward to 17. On the plus side, the survey was taken before the government's homebuyer credit was extended, and that may have negatively impacted the reading.

Going forward, neither the numbers nor the news bode particularly well for a recovery in the housing market or Home Depot.

"Both Lowes and Home Depot will hit positive same-store sales comps in the second or third quarter of next year," senior Piper Jaffray retail analyst Mitchell Kaiser told CNBC. "But given housing prices still down, they're going to inch towards down. It's the bigger ticket items that are under pressure."

News & Related Story Links:

• MarketWatch:
  U.S. Nov. home builders' index flat at 17
• CNBC:
  My Ratings on Lowe's & Home Depot: Analyst
• National Association of Home Builders:
  Builder Confidence Unchanged in November
• The Home Depot Inc.:
  The Home Depot Announces Third Quarter Results; Updates Fiscal Year 2009 Guidance