Home Depot (HD)

The housing market has experienced a significant slowdown in growth. Home Depot's revenues depend heavily on the housing market because many consumers use home equity lines of credit to finance home-improvement projects. As home values fall, lenders are now cutting off home equity lines of credit for some borrowers.

Simple fact: Lots of bad mortgages, and corresponding foreclosures mean that folks aren't likely to go out and buy that circular saw and loads of 2x4s for that 2nd story home extension. Expectations had been lowered tremendously for Home Depot on a year over year basis and the company only grazed by when using typical Wall Street accounting math.

Earnings fell over 60%, from $1Billion to $356Million ($0.21/share) and at the top line, Revenue fell from $18.5Billion to $17.9Billion. While Revenue was generally in line with expectations it took adjustments for Home Depot to match profit expectations. Since expectations were $0.37/share on a non-adjusted basis, HD revealed that it in fact would've had a more profitable quarter if it didn't take a charge for closing stores and filing away plans for future openings. Accounting for these charges, HD would've earned $0.41/share and would have beaten expectations by 4 cents. So why the 5% drop in the stock today? Investors surely can't blame oil's run to $130 a barrel for everything! Well, it's because of the fact that a company like Home Depot, which has an increasingly aggressive competitor in Lowe's (LOW) nipping at its heels, is closing stores (15 in the latest quarter) and putting the kibosh on new store plans (50 stores scrapped).

As economic conditions deteriorate and the housing market continue to be weak, demand for HD goods will remain low as long as consumers forego non-necessities.

Frank Blake is a great guy but knows nothing about the retail Building Materials business. Craig is his mentor. It is like the blind leading the blind.

The Department of Commerce reported that home construction has reached a 50-year low when the construction of new homes and apartments fell 12.8% in April 2009. This is not good news for Home Depot because the company relies heavily on construction projects for revenue. The company has already slashed prices left and right in order to get consumers. In addition, the worsening foreclosure market is also making it extremely difficult for HD to sell products. The more houses that are already available mean that few new houses need to be built. In California, one of the hardest hit states by the housing bubble, 1 out of every 54 houses has been foreclosed on.

HD Supply--the main source of recent revenue growth--is much less efficient than the retail business.

Home Depot needs to make changes if it wants to compete with Lowe's.

With the abrupt end of the housing boom in the U.S., Home Depot lost significant market share to Lowe's, which customers deemed preferable because of better quality customer service and stores that were less confusing to navigate. Despite the changes since Frank Blake took the reins of the company, the stock has remained flat.

Home Depot reported fiscal 2008 second quarter consolidated net earnings of $1.2 billion, or $0.71 per diluted share, compared with $1.6 billion, or $0.81 per diluted share, in the same period in fiscal 2007. Earnings per diluted share from continuing operations in the second quarter of fiscal 2008 were $0.71, compared to $0.77 per diluted share in the second quarter of fiscal 2007, a decrease of 7.8 percent.

Sales for the second quarter totaled $21.0 billion, a 5.4 percent decrease from the second quarter of fiscal 2007, reflecting negative comparable store sales of 7.9 percent, offset in part by sales from new stores.

"We continue to see pressure on our market and the consumer, generally," said Frank Blake, chairman & CEO. "Despite the macroeconomic conditions, we saw improved execution in our merchandising and operations initiatives during the past quarter. I am very proud of what our associates have accomplished in a difficult environment," said Blake.

Neither report ought to have investors optimistic although I guess they are less despondent than they were same time last year when omps were dropping double digits. It is safe to say that housing will lag well into if not past 2009 before it bottoms and turns. The CEO's of both Toll Brothers (TOLL) and Hovnanian (HOV) feel this way which probably means past 2009 since one would expect both to be on the optimistic side. If that is true, then there ought to be no hurry to purchase shares of either Lowe's or Home Depot since this means at best their results will stagnate and most likely continue to decline.

Should housing continue its unabated decline, a very possible scenario, then one ought to expect considerably more downside to results and shares prices.