Charlotte, NC, November 10, 2006--On the heels of disappointing results from several of their suppliers, Home Depot Inc. and Lowe's Cos. are expected to report weakening demand for home-improvement supplies when they post third-quarter earnings starting next week.
Several analysts in recent days have lowered sales and earnings forecasts for Home Depot, which reports Tuesday, and for Lowe's, scheduled to release results Nov. 20. Commentary from the retailers' major vendors and continued weakness in housing trends are generally behind the cuts, which many analysts say are already reflected in shares of Home Depot and Lowe's.
"We believe the lagged effects of the housing slowdown combined with an unexpectedly mild hurricane season to slow home-improvement demand markedly in 3Q," Bernstein analyst Colin McGranahan said in a note Wednesday, lowering third-quarter sales estimates at the companies' comparable stores to declines from gains.
Deflation in lumber has also pressured selling prices, placing an added drag on earnings, he and others said. And some vendors are trying to push through price increases to offset inflation in their own raw materials.
Still, analysts generally expect the companies to report higher earnings than a year ago.
Sales tied to Home Depot's growing business aimed at the professional market, its cost controls and share repurchases are expected to help the Atlanta retailer report per-share earnings of 76 cents a share, compared with 72 cents a year earlier, according to Thomson Financial. Wall Street looks for sales to increase 13 percent to $23.49 billion, or to rise 3.8 percent on a same-store basis, aided by new stores and expanded business lines.
The largest U.S. home-improvement retailer, a component of the Dow Jones Industrial Average, wouldn't comment ahead of results. But it has told Wall Street it expects 2006 sales at the low end of a range of 14 percent to 17 percent growth and per-share earnings at the low end of a 10 percent to 14 percent increase. That guidance assumed comparable-store sales in the second half of the year would be flat to slightly negative.
As recently as Oct. 11, chief financial officer Carol Tome reiterated expectations that economic headwinds will continue into the back half of 2007, also raising the possibility that same-store sales could decline by mid-single-digit percentages all of next year.
Shares of Home Depot, which traded at around $37.25 in early afternoon dealings Thursday, are down 8 percent so far this year, compared with a nearly 14 percent increase in the Dow.
Lowe's, meanwhile, is forecast to earn 44 cents a share, up from 41 cents a share in the year-ago period, according to First Call. Like its larger rival, Lowe's is expected to generate higher sales, thanks largely to new stores. On average, analysts expect sales to increase 9 percent to $11.56 billion, or 5 percent on a same-store basis, according to Thomson Financial. Merrill Lynch said savings from Lowe's supply-chain improvement efforts and benefits of direct product sourcing should contribute to higher earnings.
Shares of Lowe's, recently trading at around $29.52 Thursday, are down 11 percent this year.
The Mooresville, N.C.-based company also declined to comment ahead of its earnings release, but on Sept. 25 the company it expects 2006 earnings to be at or near the low end of its prior outlook for $2 to $2.07 a share.
"We expect top-line trends have continued to deteriorate from 2Q, and that the outlook from both companies will not provide much in the way of optimism," said Banc of America Securities analyst David Strasser.
Two of the three major vendors to Home Depot and Lowe's reported sales declines in their most-recent quarters, with all three suppliers saying sales growth slowed as the quarter progressed, and all three lowered fourth-quarter revenue expectations, Merrill Lynch told clients earlier this week.
