Home Depot profit slumps on housing weakness

ATLANTA (Reuters) - Home Depot Inc. (HD.N) reported a 15 percent drop in second-quarter profit on Tuesday as sales declined for the first time in more than four years amid a softer U.S. housing market.

The world's largest home improvement retailer backed its previous profit outlook, but its shares fell about 5 percent to near a year low on skittishness about a deal to sell the wholesale business and the company's current offer to buy back 250 million shares.

"The fate of the tender offer and the HD Supply deal is important," said Giri Cherukuri, head trader at OakBrook Investments, which owns 600,000 shares of Home Depot.

"Now the speculation is maybe Home Depot might lower the tender offer range or abandon it altogether."

Home Depot offered no update on the sale of its HD Supply unit, which is being renegotiated. But Chief Financial Officer Carol Tome said on a conference call that should the deal fail, a planned $22.5 billion buyback could be cut to $12 billion.

Net earnings fell to $1.59 billion, or 81 cents a share, in the second quarter ended July 29, down from $1.86 billion, or 90 cents a share, a year earlier.

Excluding discontinued operations, earnings for the latest period were 77 cents a share, better than the 72 cents expected by analysts, according to Reuters Estimates.

Sales fell 1.8 percent to $22.18 billion, the first drop in overall sales since the fourth quarter of 2002. Sales at stores open at least a year fell 5.2 percent.

Earnings at Home Depot and rival Lowe's Cos. Inc. (LOW.N) have weakened over the past year as slowing home sales, falling home prices and higher borrowing costs have hurt sales.

Home Depot's average purchase fell 2.8 percent to $58.30 during the quarter, but the number of customer transactions rose 1 percent. The chain said it gained market share in flooring, appliances and paint, but lost share in kitchens and millwork.

SUPPLY SALE IN FLUX?

Last week, Home Depot said it was in talks with private equity buyers that could lower the $10.3 billion sale price for HD Supply, which provides materials to home builders and other contractors. It also cut the price of its July tender offer to buy back 250 million shares to a range of $37 to $42 a share, from the previous $39 to $44.

The sale of the supply unit and "Dutch auction" tender offer were part of a bigger plan Home Depot announced in June to repurchase $22.5 billion in stock.

"It sounds as if there is a higher chance that HD Supply does not sell," Stifel Nicolaus analyst David Schick said in a research note on Tuesday. With no sale, Home Depot "may have to pull or shrink the tender offer," he added.

The supply business, now classified as a discontinued operation, had earnings of $66 million, or 3 cents a share, in the second quarter, down from $161 million, or 8 cents a share, a year earlier. The latest quarter included a tax charge of about $60 million.

Home Depot expects soft industry conditions into 2008. It reiterated that full-year per-share profit could fall 15 percent to 18 percent this year, or 12 percent to 15 percent on a continuing basis, excluding a 3 cent-a-share benefit from an extra week.

Home Depot shares fell $1.72, or 4.9 percent, at $33.52 on the New York Stock Exchange, near a year low of $33.08 and dragging down the Dow Jones Industrial Average, which was off more than 1 percent.

Lowe's slipped 79 cents, or 2.9 percent, to $26.75. Home Depot's stock is down about 17.6 percent this year, while Lowe's is down 13.9 percent.