Home Depot warns of earnings shortfall

In a widely anticipated announcement ahead of recently installed Chief Executive Frank Blake's first meeting with analysts, the Atlanta-based home-improvement giant (HD :

Home Depot, Inc

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Last: 39.82-0.97-2.38%
7:36am 02/28/2007
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HD39.82, -0.97, -2.4%) said it expects earnings per share to drop 4% to 9% for the fiscal year.

That would imply a range of $2.56 to $2.68 a share -- well below the average estimate of $2.78 a share derived in a surve of analyst estimates by Thomson Financial. Last year, the nation's largest home-improvement retailer made $2.79 a share, before adjusting for severance charges.

Noting that management doesn't expect the residential construction and housing market to improve until the end of the year or early fiscal 2008, Home Depot said it expects sales to fall flat or to inch up only 2% at the most.

And in an indication that the company might not separate or sell off the HD Supply division, Home Depot said its services division will contribute about 15% of total sales this year compared with last year's 13%.

Home Depot's also looking at same-store sales, an important industry measure of the health of a retailer's top-line growth, to drop at a rate in the negative mid-single-digits.

New-store openings will be limited at 115 for the year, while the company ups its capital expenditures in new and existing stores to $4.5 billion.

In a bow to the company's core business, Blake said that Home Depot will focus on its do-it-yourself strategy.

"We are first and foremost a retail business, and our 2007 plans reflect that commitment," Blake said in the release.

"While the current home-improvement market remains challenging, the long-term fundamentals of our company are strong, and we believe we can improve our performance and grow at, or faster than, the market beyond 2007," he added. "That's why we are making significant investments in our associates and our stores."

Blake outlined where money would be spent according to a five-point priority list he has talked about since taking the helm of the company in January. See more retail coverage.

Home Depot, which has been highly criticized for cutting the number of store associates -- those called the "orange aprons" -- on the floors in a bid to shore up spending, will replenish the ranks with people who can explain how to install a bathroom sink or explain the vagaries of wood and paint finishes in detail.

The company said it will spent $350 million as it simplifies its staffing model, enhances in-store computers for customer assistance and redesigns its compensation and reward plans.

Probably most important, the company made a commitment to recruit "master trade specialists" among the new hires.

The company also plans to sink $260 million this year into merchandising initiatives, including new product innovation, thought it didn't explain what that might entail. It also will put $275 million into keeping stores adequately stocked.

Another $865 million will be earmarked toward the stores themselves, mostly for what the company called "sustained maintenance" and new product layouts.

Home Depot, which has long relied on the professional repair and remodeling market for a chunk of sales, will funnel some $415 million into new and existing programs aimed at shoring up loyalty through volume discounts, direct-shipping programs, credit programs and other specialty sales initiatives.

Home Depot expects these initiatives, coupled with share repurchases, to pay off beyond 2007, forecasting that earnings per share will grow at a 10% clip annually -- faster than the approximately 5% growth projected for total sales.

Home Depot's shares, part of the Dow Jones Industrial Average, fell modestly during Tuesday's market meltdown to $39.82.