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Home Depot Calls a Bottom

Yesterday, Home Depot (NYSE: HD  ) basically said the worst of the housing debacle is over. Is this a real, live "green shoot" that so many investors are digging desperately for, or just one more example of wishful thinking?

In keeping with the "worst is over" theme, Home Depot said it believes it could produce flat to negative 7% earnings this year instead of the negative 7% decrease it had predicted in its February guidance. The company is improving operating efficiencies in order to bolster margins and is working on customer-oriented initiatives such as providing bilingual staff and better service, as it continues to battle against hardware rival Lowe's (NYSE: LOW  ) . Bear in mind, though, Home Depot still expects a 9% drop in annual sales.

The bursting of the housing bubble is one of the major challenges Home Depot faces. Many retailers are suffering because consumers have a myriad financial problems, including plunging home prices, resetting option-ARM mortgages, unemployment, and sheer over-indebtedness from liberal use of plastic bearing the logos of Visa (NYSE: V  ) or MasterCard (NYSE: MC  ) .

And of course, the housing debacle directly impacts Home Depot's business, just as the boom benefited it when people upgraded their homes to sell for big bucks. The fact that Costco (Nasdaq: COST  ) recently ditched its home concept probably tells us a lot about how badly this segment of retail has tanked, too.

Home Depot can say that it believes the worst is over, but the fact that management pointed to certain "economic indicators" as proof should certainly make you wonder if it’s simply drinking the same Kool-Aid as the folks who keep pointing to the flimsy, maybe even imaginary, "green shoots."

Plenty of people believe the worst is not over for the housing market or for the economy in general, and that this is just the eye of the storm. After all, increasing unemployment means more foreclosures, even among those who were previously considered "prime" credit risks. Some reports suggest that more than one million option ARM mortgages are expected to reset higher in the next four years. And of course, there's still a major glut of housing inventory out there to begin with. 

Recent data out of the retail space in general also implies that consumers aren't exactly feeling flush, and even when things do get better, consumer mindsets may be a heck of a lot more prudent than they were during the bubble. While discount retailers such as Wal-Mart Stores (NYSE: WMT  ) have managed to survive and even thrive in this climate, the chic-er Target (NYSE: TGT  ) has been less adaptable.

Take Home Depot's tidings as you wish; I know some people believe recovery's just around the corner. However, when it comes to retail, Home Depot and its rival Lowe's aren't stocks I’m interested in checking out right now; the continued challenges to their market are too great.

For further Foolishness:

Home Depot and Costco are Motley Fool Inside Value recommendations. Costco is also a Stock Advisor recommendation, and the Fool owns shares of it. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (9)

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  • Report this Comment On June 11, 2009, at 5:21 PM, hdhomedepot wrote:

    Actually, the outlook we provided at our analyst meeting was based on our performance to date this year and not on a “rosy” view of the future. In fact, we specifically said we’re not out of the woods and have reason to believe the back half of the year will be challenging.

    Here’s an excerpt from what our CFO actually said at the meeting:

    Private fixed residential investment as a percent of GDP now stands at 2.7 percent compared to a 60 year mean of 4.8 percent.

    That's the good news. We are, however, concerned about foreclosure density and velocity.

    Using data from realtytrac, we've calculated the foreclosure density of each state. We define high foreclosure states to be any state where one home out of at least 200 homes is in foreclosure.

    There are 13 high foreclosure states in our country. In those 13 states, we look to see if the rates of foreclosure are accelerating or decelerating. In 7 states there was foreclosure acceleration in the first quarter.

    In those states, we saw that our comps were worse than the company average. Approximately 26 percent of our store base is found in those states. For the 6 high foreclosure states that had decelerating foreclosures, our first quarter comp sales were generally flat to better than the company average.

    Georgia and Colorado were the exception and we think weather had something to do with that.

    This is just one data point among many, but we use it to illustrate why we think the signals are mixed.

    We are lifting our guidance today because of our year-to-date performance but our view is that the back-half will remain challenging...we aren't out of the woods.

    --- Ron DeFeo, The Home Depot

  • Report this Comment On June 11, 2009, at 8:39 PM, Foo2012 wrote:

    Here in the San Jose, CA, there are five Home Depots within a ten minute drive from my house, and they have all been like ghost towns, lately. From a casual perspective, it appears to me that sales will be down WAY more than 9%, at least in this area...most of the activity I do see, appears to be homeowners & DIYers, not so much the commercial traffic that is usually there.

  • Report this Comment On June 12, 2009, at 8:29 AM, lemoneater wrote:

    I- live in the Carolinas and I believe that this region didn't have as much of a bubble in real estate as many other parts of the country. Both Home Depot and Lowes in my area are experiencing modest traffic as indicated by the respectable number of cars and trucks in the parking lot. I wonder how much of the revenue of either store is due to lawn and garden sales. Last year we had a bad drought, but this year has been much better my sweet corn is already kneehigh :) I have noticed many more people gardening this year. (Disclosure I own some shares of Lowes)

  • Report this Comment On July 09, 2009, at 8:46 AM, anonym597 wrote:

    I find Home Depot to be more pleasant to shop than Lowe's. Lowe's usually has 4x more employees than customers and employees usually huddle in the corners of the store chatting while customers walk aimlessly thru ailes. Home Depot has much better service than Lowe's and thats what going to get them thru this economy.

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