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A Rocky Recovery for Home Depot

Posted by: Ben Steverman on November 17

Wall Street is hoping for a strong economic recovery, but again and again investors are disappointed by signs that American consumers remain cautious and careful about opening their wallets. The latest evidence arrived Nov. 17, when Home Depot (HD) reported earnings.

Home Depot’s profits actually beat expectations, but what worried Wall Street was the picture executives painted of their customers’ moods. “There is still a great deal of pressure in the housing and home improvement markets, though there are some positive signs of stabilization,” Frank Blake, Home Depot’s chairman and chief executive said in a statement.

There are at least a few reasons for Home Depot to be upbeat. Many sales measures did improve from the second quarter to the third.

According to comments to analysts by Blake and other executives, Home Depot customers are happy to spend on simple home remodeling projects. Basic maintenance — plumbing repairs, for example — is still being done. Customers are also launching do-it-yourself projects, including boosting the energy efficiency of their homes. Finally, customers are updating the decor with new coats of paint or new carpet, or sprucing up their yards with better gardens.

What Americans aren’t doing, however, is launching major remodeling or expansion projects. Executives said lumber, hardware, electrical and mill work sales all underformed. The average customer’s sales ticket was down, a sign contractors are still spending a lot less at Home Depot, the world’s largest home improvement chain.

The caution from Home Depot on the consumer environment echoed comments from rival Lowe’s (LOW) when it reported earnings on Nov. 16. Lowe’s chairman and chief executive Robert Niblock said in a statement:

The broad-based pressures of the macro environment are clearly evident in our sales as consumers continue to delay large purchases until they feel better about the economic outlook.

Home Depot’s gloomy outlook sent share tumbling more than 3% lower by midday on Nov. 17. Lowe’s shares also slipped.

But focusing on one day’s stock performance might overstate the significance of current pessimism about the U.S. consumer. Home Depot shares are still up 7% in November, while Lowe’s shares have risen almost 10%. Third quarter results may discourage unrealistic investor expectations, but they don’t mean the U.S. consumer is hopeless in 2010 and beyond.

And, analysts praised Home Depot’s ability to cut costs. Morgan Stanley (MS) analyst Matthew McGinley wrote:

To the extent that it is sustainable, this [cost-cutting] reflects the potential to expand margins dramatically in a sales upturn. … [Home Depot] management deserves an award for cost control in 2009, but the stock may pause unless we see confirming evidence that 2010 [sales trends] will be positive.

“While the stock should give back some of its recent gains,” JPMorgan (JPM) analyst Christopher Horvers noted, sales and profit margins should improve. “We believe a longer view is appropriate.”

Robert W. Baird analyst Peter S. Benedict also saw the glass as half full. “Bottom line,” he wrote: “More signs of stabilization here, and we see improved trends going forward.”

The big question for Lowe’s and Home Depot is how long the U.S. consumer continues to put off major home improvement projects. Many Americans may be contemplating major addition to their houses or the construction of a new deck or garage. But they can’t be expected to make such major expenditures until their confidence — in their jobs and in their investments — truly returns.

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Reader Comments

Robert

November 17, 2009 05:33 PM

Is it just me or do other people believe also that a 5 year old child or even an ape could cut costs at a major American corporation? I'd like to see a management team again who can grow revenues, and employment. That would be leadership!

Seeer

November 18, 2009 08:18 AM

Robert, I agree a monkey could cut costs. I haven't seen leadership that deserves more than 150k and basic benefits at most companies. The real innovators and job creators seem to be the founders of small companies that put their heart, soul and their own money on the line. Most of these million dollar executives should only be paid on value created and not metrics they chosen by their lackies like Narpiggi did. This is true of most of the Fortune 500. They risk nothing and demand everything and many times end up screwing the customer, stock holder and employee like Nardelli did. Blake seems to be a good guy, but definitely not a Steve Jobs or even close.

Seeer

November 18, 2009 08:18 AM

Robert, I agree a monkey could cut costs. I haven't seen leadership that deserves more than 150k and basic benefits at most companies. The real innovators and job creators seem to be the founders of small companies that put their heart, soul and their own money on the line. Most of these million dollar executives should only be paid on value created and not metrics they chosen by their lackies like Narpiggi did. This is true of most of the Fortune 500. They risk nothing and demand everything and many times end up screwing the customer, stock holder and employee like Nardelli did. Blake seems to be a good guy, but definitely not a Steve Jobs or even close.

Wayne Dusek

November 18, 2009 10:51 AM

Why would a CEO want to actually improve a company when he can run it into the ground and get fired. He gets billions in pay, bonuses and severance for his work and goes on to do the same thing at his next company where he demands even more.

Wayne Dusek

November 18, 2009 10:51 AM

Why would a CEO want to actually improve a company when he can run it into the ground and get fired. He gets billions in pay, bonuses and severance for his work and goes on to do the same thing at his next company where he demands even more.

ROBERT HUESMAN

November 18, 2009 01:33 PM

I agree with Wayne. If you look at Corporate Management from the perspective of the HARVARD MBA TYPES, why in the world would you do anything but cut, cut, cut, until it can't be cut any more, then take your golden parachute and run to the next high powered company and do it all over again. You can't blame these guys, they're just doing what they've been taught to do, every day of their business education. Get what you can, when you can and then leave. Look at what happened to CIT! They should change the name of these schools to reflect they're true nature. For instance: Harvard School of Greed and Avarice.

Strategery

November 18, 2009 03:33 PM

Home Depot is yet another company that has failed, in part, because of former GE executives. Their recent advertising gimmick is a joke; they still want $29 for a gallon of their store-brand paint, for example. If you're headed there just to pick up a few things, be prepared to part with a C-note or two.

Jim Magnotta

November 19, 2009 12:27 PM

Wayne nails it! (pun intended) Anything thing less than perpetual growth and rising profits is seen as failure. Talk about an unsustainable model.

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iamninja

November 23, 2009 05:44 PM

interesting read -have a look at www.iamninjatrader.blogspot.com

Ali

December 4, 2009 01:36 PM

Hi Ben,

This is a good article. I learned a lot from it, but no so much from comments. Businessweek website is what it should be. thanks,

Ali

Clyde

December 22, 2009 04:33 PM

Let face facts. The consumer boom is over. Those of us who were smart and purchased new housing a few years ago and did not supersize it are happy and content. We do not want to expand the size of housing we have. Those who did are downsizing if they can. I expect value for my dollar and I spend when I see a better than average value for my buck.

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Businessweek’s Emily Thornton, Amy Feldman, Ben Levisohn, and Ben Steverman focus on matters great and small for investors, from the views of a hot fund manager to an explanation of the latest products devised by Wall Street’s rocket scientists. Exploring trends in any area, from bonds and stocks to closed-end funds and futures, always with an eye towards giving investors a better understanding of the sometimes confusing and often chaotic world of finance. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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