November 16, 2010 / 11:17 AM / 8 years ago

Home Depot echoes Lowe's with focus on costs

NEW YORK (Reuters) - Top home improvement chain Home Depot Inc (HD.N) is relying on cost cuts to fight lackluster demand for expensive renovations in a slowly recovering U.S. economy.

People shop for lumber at a Home Depot store in New York, July 29, 2010. REUTERS/Shannon Stapleton

The company beat quarterly earnings estimates and raised its profit outlook for the year, but cut its full-year sales forecast as U.S. consumers put off expensive renovations and opt for repairs and smaller remodeling projects instead.

Home Depot has benefited from a slower expansion strategy, supply chain improvements and cost cuts that included job reductions in January. It said it would continue to invest in its efforts to improve merchandise and distribution.

The sentiment echoed that of smaller rival Lowe’s Cos (LOW.N), which said on Monday it would focus on boosting margins and market share in the coming year rather than bet on a U.S. economy plagued by high unemployment.

“Both Home Depot and Lowe’s are relying on their strong free cash flow and aggressive stock buyback programs to help support EPS growth,” RBC Capital Markets analyst Scot Ciccarelli said.

Ciccarelli continues to see a strain on sales for both home improvement chains with falling home prices and macroeconomic pressures.

“The consumer is still cautious ... If you view your home as an expense rather than an investment, you are not as inclined to spend, Chief Financial Officer Carol Tome told Reuters.

U.S. home-builder sentiment in November rose slightly for the second straight month, although it remains at historically low levels, a survey released on Tuesday showed.

Home Depot, which saw strength in its Central and Mid-Atlantic markets, said sales at U.S. stores open at least a year rose 1.5 percent. Domestic same-store sales at Lowe’s gained just 0.2 percent.

Even though Home Depot outperformed Lowe’s on the U.S. same-store sales front, Ciccarelli prefers shares of Lowe’s due to their cheaper valuation and the potential for more incremental cost cuts.

Raymond James analyst Budd Bugatch gave Home Depot’s shares the nod instead.

“We were ... impressed by Home Depot’s third-quarter sales and earnings performance given supplier reports, other macro data ... Irrespective of the slow overall economy, Home Depot is clearly outperforming and gaining market share,” Bugatch said.

BIG-TICKET SALES TEPID

Home Depot’s net income rose to $834 million, or 51 cents a share, in the third quarter that ended October 31, from $689 million, or 41 cents a share, a year earlier.

Analysts on average were expecting 48 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 1.4 percent to $16.60 billion, slightly above the analysts’ average estimate of $16.59 billion.

While demand for plumbing repair, fasteners, water heaters and cleaning products was strong, discretionary spending in areas including kitchens was weak.

Transactions of $900 and above — about 20 percent of U.S. sales — were down 3.4 percent in the third quarter, Craig Menear, executive vice president of merchandising, said on the conference call.

In a positive signal for the economy, sales at U.S. retailers posted their strongest gain in seven months during October, boosted by purchases of motor vehicles and building materials, according to Commerce Department data.

Home Depot forecast earnings of $1.94 a share from continuing operations for the current fiscal year, up 4 cents from its prior outlook. The company expects sales growth of about 2.2 percent, down from a prior view of 2.6 percent.

Reporting by Dhanya Skariachan; Editing by Dave Zimmerman and Maureen Bavdek

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