Housing woes cloud Home Depot, Lowe's outlooks

ATLANTA (Reuters) - Home retailers Home Depot Inc (HD.N) and Lowe's Cos Inc (LOW.N) have taken a beating this year as results weakened in the wake of the crumbling U.S. housing market, and experts said more pain is possible in coming quarters.

Both chains are expected to report lower earnings, Home Depot on Tuesday and Lowe's next Monday, and investors will be listening for indications of when a recovery might start to take shape.

"If they ... suggest that things are going to improve in middle to late 2008 that could be a positive," said Zahid Siddique, an analyst with Gabelli & Co. "If they say things are going to be even worse, they may take more of a beating."

Analysts on average expect Atlanta-based Home Depot to post profit of 60 cents a share, down from 73 cents a year earlier, according to Reuters Estimates.

For Lowe's, based in Mooresville, North Carolina, analysts expect third-quarter earnings of 42 cents a share, down from 46 cents a year ago.

Both stocks touched 52-week lows in the past week after some analysts lowered their ratings and price targets. Deutsche Bank, for example, cut its rating on the two chains to "hold" from "buy," saying the housing market showed no signs of recovery.

Home Depot's stock, which rose 41 cents to $28.46 on Monday in New York Stock Exchange trading, is down 29 percent this year. Lowe's, which was up 45 cents to $24.37, has fallen 22 percent.

Home-goods companies have been pressured by the U.S. housing meltdown, uneven consumer spending, credit worries and rising gasoline prices. Buyers are putting off purchases of big-ticket items such as furniture, while slower housing purchases mean fewer homes to furnish or renovate.

Sales of previously owned homes fell 8 percent in September to a record low pace, while the national median home price for both single-family and condos dropped 4.2 percent, the National Association of Realtors said last month.

"Consumers who might have undertaken a major renovation to their home are cooling on those projects," said Nick McCoy, senior consultant with TNS Retail Forward.

"We're seeing most of the activity ... right now on the smaller spruce-up side of things," such as painting a room, McCoy added.

PROBLEMS ALL AROUND

Major suppliers to Home Depot and Lowe's have also posted weak recent results.

Masco Corp (MAS.N), which makes faucets, paint and cabinets, posted a 19 percent drop in third-quarter profit. Whirlpool Corp (WHR.N), the world's biggest appliance maker, said third-quarter revenue fell 8 percent in North America, its largest market.

"The general sense I get from the suppliers is that things are weak and there's no clear visibility as to when things will improve," Siddique said.

Home Depot, which named a new chief executive and sold its wholesale distribution unit this year, could get a lift if it comments on the timing of an expected second part of a share repurchase, Siddique said.

Earlier this year, Home Depot bought back about 290 million common shares for $10.7 billion, partly financed with proceeds from the sale of the Home Depot Supply unit. That buyback was part of a bigger $22.5 billion repurchase announced over the summer.

"If Home Depot talks about the remaining buyback and when it is going to do that, that could also help the stock," Siddique said.

Lowe's warned in late September that earnings for the year ending in February could be slightly below a range of $1.97 to $2.01 a share it forecast in August. Lowe's added that drought in some parts of the United States was also hurting sales.

Many companies have stated that they don't expect the housing market to show positive signs until the end of next year. Robert Shiller, a Yale University economist, told Reuters that the housing skid could extend for another five or 10 years.

"Even when things begin to turn around, housing starts are going to be slow to pick up," said McCoy.

(Additional reporting by Julie Haviv in New York; Editing by Leslie Gevirtz)