Foolish Forecast: Home Depot Falling Apart?

Against all odds, Home Depot (NYSE: HD) managed to "beat earnings" last quarter -- the first time that had happened in more than a year. Big Orange reports its Q3 numbers Tuesday morning, and investors are looking for a repeat.

What analysts say:

• Buy, sell, or waffle? Twenty-two analysts wander the aisles at Home Depot, in search of a light bulb. Nine of them rate the stock a buy, a dozen say "hold," and one would sell.
• Revenue. On average, they're looking for sales to slide 16% to $19.48 billion.
• Earnings. Same with profits. They're predicted to drop 16% to  $0.61 per share.

What management says:
The big news at Big Orange came in two installments this quarter. Let's address the sale of Home Depot Supply first; we'll look at the "recapitalization" plan in a sec. In August, Home Depot came full circle on its ill-fated foray into the commercial construction materials business. Bain Capital Partners, The Carlyle Group, and Clayton, Dubilier & Rice scored HDS for a 17% discount to their original $10.3 billion offer, and convinced HD proper to (1) buy back a 12.5% slice of the business for $325 million, and (2) guarantee a $1 billion loan. Nice deal if you can get it -- and if your name isn't "Home Depot."

While I think HD took a drywall screw on the deal, Foolish minds can differ on the point. The buyout blunders at Harman and Sallie Mae show us that HD could have lost this deal entirely. Over at Motley Fool Inside Value, where we have recommended the stock, fellow Fool Alex Dumortier argues that while he'd "have preferred the [$10.3 billion] price ... we continue to support the sale and feel the terms are acceptable under the circumstances."

What management does:
Home Depot has shed a full percentage point worth of gross margin over the last 18 months. Sadly, operating and net margins are looking even worse than that. In fact, all three flavors of rolling margins have fallen for three quarters straight, and they continue to trail those of rival Lowe's (NYSE: LOW).

Margins	4/06	7/06	10/06	1/07	4/07	7/07
Gross	33.7%	33.6%	33.4%	32.8%	32.7%	32.7%
Operating	11.8%	11.8%	11.5%	10.8%	10.2%	9.9%
Net	7.4%	7.5%	7.2%	6.3%	5.9%	5.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Less than two weeks after unloading HD Supply, Home Depot proper reported the results of its Dutch auction. The company spent $10.7 billion to buy back 289.3 million of its shares, or 14.6% of the share count. CEO Frank Blake further promised to "execute the rest of the [$22.5 billion recapitalization plan] as soon as practicable" and "may repurchase additional shares in the form of open market purchases, accelerated share repurchases and/or additional tender offers."

Of course, the company spent $37 per share to buy back the same kind of shares that today can be had for $28. Combined with the sale-at-a-loss move at HD Supply, that leaves at least one Fool (me) wondering how much more maximization of shareholder value HD investors will be willing to endure.