Wednesday, February 25, 2009

Home Depot swings to $54 million loss

Home Depot swings to $54 million loss

Results excluding charges exceed Wall Street expectation

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Home Depot Inc. said Tuesday that it swung to a loss in the fourth-quarter, hurt by restructuring costs and lower demand amid the malaise in the housing market and the onslaught of rising job losses.


Investors pushed up the stock after results excluding items exceeded Wall Street expectations and the company cited improvements in market share and other business operations. For instance, 1,000 of its stores by the end of this year, and all of its stores by the end of next year, will be getting merchandise from flow-through centers, instead of directly from its suppliers as in the past to improve efficiency, Chief Financial Officer Carol Tome said in an interview.
She said Home Depot also has been able to lower opening prices on products such as paint to help bolter sales of more profitable items such as paint brush and has been able to use tools to better control inventory and reduce discounts to respond to the cutbacks in consumer spending.

"We called this downturn a few years ago," she said in an interview. "We took square footage growth down. We focused on brining tools to better manage gross margin and control inventory."

While the company's gross margin dropped by about 0.3 percentage point, hurt in part by a stronger dollar, its gross margin in the U.S. rose slightly on inventory control, Tome said.

Its shares jumped more than 10% to close at $20.67. Rival Lowe's shares rose 3% to $15.61.

The world's largest home-improvement retailer, a Dow component, reported a fourth-quarter loss of $54 million, or 3 cents a share, after charges to exit businesses and to write down its investment in HD Supply. It earned $671 million, or 40 cents, in the year-earlier quarter.

Sales fell 17% to $14.6 billion, with comparable-store sales declining 13%.

Excluding restructuring charges and the write-down costs, Home Depot said it would have earned 19 cents a share.

Analysts surveyed by FactSet had expected an average profit of 16 cents a share on sales of $14.7 billion.

"The company managed inventory and expenses well to counter a difficult sales environment," said Sanford C. Bernstein & Co. analyst Colin McGranahan. Home Depot's "guidance shows that the company has additional levers available to further cut expenses."

"The housing market is still depressed," said Chief Executive Frank Blake on a conference call with analysts, adding that the percent of gross domestic product now spent on housing related construction is at 3.1%, the lowest in six years of recorded data. He said while the company has seen some improvement in California and Florida markets, the improvements are more than offset by declines elsewhere in the country, such as in Seattle.

An economy in recession and the collapse in the credit markets have hit retailers across the board and cut demand, especially for big-ticket purchases and other discretionary spending. Home Depot said overseas, its Canadian business that started the year strong declined in the second half as global economy weakened. Its China and Mexico businesses, however, remained strong, the company said.

Home Depot said it has lowered inventory by over $1 billion as a wide swath of retailers and their suppliers are controlling inventory and cutting expenses in the face of uncertain sales. It's also improved customer service and started a lower price campaign to attract budget-conscious shoppers. It said it's picked up market share in categories such as carpet, hand tools and windows.

Better buy than Lowe's?

In January, Home Depot said it will exit its underperforming Expo design and décor business, close 41 design and other non-core stores and shift to a region and district-based support model in a series of decisions that's expected to cut 7,000 jobs. The company also announced last month that it was initiating a salary freeze among all officers and lowering capital spending. See earlier story.

Home Depot's release comes four days after its smaller rival Lowe's Cos. reported a worse-than-expected 60% decline in profit, after lower demand and intense competition forced it to cut prices more than planned.

Lowe's gave first-quarter and full-year forecasts that missed Wall Street expectations and said it's implementing additional cost cuts such as freezing the salaries of all vice presidents and above for this year, reducing the level of its planned merit increase for others and paring back its store opening plan. See full story.
Analysts such as Gary Balter of Credit Suisse have said that Home Depot should fare better than Lowe's because it's had a better control of its inventory. Its gross margin decline was also smaller than Wall Street expectations, analysts said. Balter said Home Depot has implemented new assortment and merchandise planning tools, installed a new distribution network and controlled inventory to bolster its margin.

Home Depot "clearly has stronger momentum" than Lowe's, said Balter in a note.

Its like-for-like U.S. same-store sales dropped 9.2%, compared with Lowe's decline of 9.9%, representing the best performance Home Depot has had over Lowe's in the past three years, which implied Home Depot could be picking up some market share, said McGranahan.

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