Home Depot sees profit growth though demand lags

By Dhanya Skariachan

NEW YORK (BestGrowthStock) – Home Depot Inc (HD.N: ) still sees room for profit growth this year as consumers take up long-delayed maintenance and repair projects for their homes, even if a return to bigger renovations will have to wait.

The company posted a higher-than-expected quarterly profit and raised its full-year earnings forecast on Tuesday, helped by cost controls. While sales missed expectations in a weak economy, investors were relieved that the top home improvement chain still expects an increase for the rest of the year.

“We come in looking at these numbers and think that … things really did not fall apart,” said Thomas Villalta, a portfolio manager at the Jones Villalta Opportunity Fund in Austin, Texas, which owns Home Depot shares. He applauded the company’s performance amid macroeconomic pressures.

Home Depot’s results echoed those of rival Lowe’s Cos Inc (LOW.N: ), which reported on Monday. [ID:nN16250437] Shares of both companies rose for the second straight day on hopes that are poised to grow once consumer sentiment perks up.

While both home improvement chains have yet to see demand for expensive home projects such as special-order kitchens, they have benefited from U.S. consumers selectively spending on repairs and replacing appliances with energy-efficient ones.

Home Depot plans to focus on cheaper products like faucets, paints and simple flooring projects to drive traffic as it sees limited room for “ticket growth” in the weak sales climate.

In an interview, Chief Financial Officer Carol Tome told Reuters that a recovery in demand for expensive renovations is highly dependent on the economy. That said, she sees little chance of a double-dip downturn in the U.S. economy.

“I don’t think there is a double dip looming … But it sure is sluggish,” Tome said by phone.

“As uncertain as the economic climate is, we are seeing our business return to sales growth and the hardest hit parts of the country start to stabilize,” Chief Executive Frank Blake had said earlier on a conference call.

Blake pointed out that 70 percent of the company’s top 40 U.S. markets reported same-store rises in the second quarter, with key markets like Florida and California performing in line with the company average.

Home Depot’s net income rose to $1.2 billion, or 72 cents a share, in the second quarter ended August 1 from $1.1 billion, or 66 cents a share, a year earlier.

Analysts on average were expecting 71 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 1.8 percent to $19.41 billion, missing the average estimate of $19.59 billion.

Home Depot forecast earnings of $1.90 a share from continuing operations for the current fiscal year, up 2 cents from its prior outlook. For the prior year, it reported profit of $1.66 a share from continuing operations, before charges.

The company expects sales growth of about 2.6 percent, down from a prior view of 3.5 percent.

Home Depot is implying a 2 percent same-store sales gain for the second half of 2010, similar to Lowe’s, JPMorgan analyst Christopher Horvers said.

“The top-line guidance should relieve concerns that its competitor (Lowe’s) was being too aggressive on its sales forecast and supports our view that modest comps (modest increases in comparable-store sales) are achievable based largely on repair and maintenance spending,” Horvers added.

Sales at stores open at least a year rose 1.7 percent globally. UBS analyst William Truelove had expected an increase of 3.5 percent, while Wall Street on average had forecast growth of 2.3 percent, according to an early note.

Same-stores sales rose 1 percent in the United States, the company’s main market. Lowe’s, which has few stores outside the United States, posted a 1.6 percent increase for its latest quarter.

Home Depot shares rose $1.30 or 4.7 percent to $28.68 on Tuesday, while Lowe’s gained 45 cents or 2.3 percent to $20.15.

RBC Capital Markets’ Scot Ciccarelli said he had a modest preference for Lowe’s shares over Home Depot’s considering the former’s cheaper valuation.

MANAGING COSTS

Like many other retailers, Home Depot has tightly managed costs to offset tepid sales. It has benefited from a slower expansion strategy, improvements to its supply chain and cost cuts that included job reductions in January.

“We executed well during the first half of the year,” CFO Tome said on the call. “But economic recovery is progressing at a slower pace than we originally expected.” She told Reuters that she sees more room to cut costs by installing new technology and other smaller initiatives.

(Reporting by Dhanya Skariachan; Editing by Michele Gershberg, Gerald E. McCormick)

Home Depot sees profit growth though demand lags