NEW YORK (Reuters) - Home Depot Inc reported higher-than-expected quarterly earnings as massive cost cuts offset weak sales, but its shares fell as investors found the results disappointing in comparison with those of smaller rival Lowe’s Cos Inc.
Home Depot also affirmed its fiscal-year outlook. The world’s largest home improvement chain, Home Depot has been upgrading service and products in its core retail business to win back market share as Lowe’s expands.
Lowe’s reported quarterly earnings above market estimates on Monday as it saw some strength in outdoor projects during the spring, even though consumers still kept away from major home renovations.
“Home Depot wasn’t good enough,” RBC Capital Markets analyst Scot Ciccarelli said, adding that many investors were disappointed the company had not raised its outlook.
Ciccarelli said he prefers Lowe’s to its larger rival as Lowe’s has enough store growth to benefit once the economy recovers and its stock is cheaper than Home Depot.
Wall Street Strategies analyst Brian Sozzi said he was disappointed with Home Depot’s results because its same-store sales were weaker than Lowe’s.
As U.S. consumers tighten their purse strings and stay away from big-ticket items, home improvement chains have cut costs aggressively to protect margins.
Earlier this year, Home Depot announced plans to freeze officers’ salaries and close certain specialty outlets to save money in the recession and prolonged U.S. housing slump.
The Atlanta-based company, which shed about 7,000 jobs from the closure of the Expo Design Center chain and other corporate cuts earlier this year, said operating expenses fell 16.4 percent in the latest quarter.
Both Home Depot Inc and Lowe’s benefited from a “do-it-yourself” approach taken by recession-fighting consumers, with higher sales of paints and plants in the latest quarter.
While sales of big-ticket items continued to suffer, Home Depot saw flat or positive growth in seasonal categories related to outdoor projects like landscaping, live goods, fertilizers and seed.
It also saw simple remodeling and decor categories, such as special-order carpet, ceramic tile and window coverings, gaining traction in the quarter.
“People are spending money to maintain ... If you have a leaky faucet, they will come in and buy the washer (plumbing part) rather than replacing the faucet,” Home Depot CFO Carol Tome said in an interview.
LACKLUSTER SALES IN SLUMP
Net profit rose to $514 million, or 30 cents a share, in the first quarter ended on May 3 from $356 million, or 21 cents a share, a year earlier.
Excluding items, the company earned 35 cents a share. Analysts on average were expecting 28 cents, according to Reuters Estimates.
Sales fell 9.7 percent to $16.2 billion. Sales at stores open at least a year, an important measure of retail performance, fell 10.2 percent.
“Our markets, and the consumer in general, remain under pressure,” Home Depot Chief Executive Frank Blake said in a statement.
On Tuesday, the U.S. Commerce Department said new housing starts and permits fell to record lows in April, denting hopes that the market was stabilizing.
“We are concerned about accelerating rates of foreclosures, particularly in the western part of the country, where there is already a high density of houses in foreclosure,” Blake said on the call.
For the full year, Home Depot sees sales down 9 percent, with comparable-store sales falling at a high single-digit percentage rate. It expects earnings per share from continuing operations to decline 7 percent.
Home Depot shares were down $1.30, or 5 percent, at $24.72 in late New York Stock Exchange trading. The stock had risen 6.6 percent on Monday on optimism from Lowe’s results.
Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn, Gary Hill
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