Investing in big-box retailers is leading to big blowups these days, with surprisingly dour results from the likes of Wal-Mart
It sounds pretty grim, but according to superinvestor Bill Miller, he who has the lowest cost wins, provided that operational weakness is a short-term matter that will work itself out over the longer term. Home Depot obviously has some kinks to work out, but could still do quite well for Fools willing to look a bit further out on the investment horizon.
The second-quarter results released Tuesday definitely weren't pretty, as total sales fell 2%, same-store sales deteriorated 5.2%, and diluted earnings from continuing operations dropped 6%. During the earnings conference call, management described the quarter as "more difficult than disappointing," which is little consolation, given that it still expects full-year earnings to decrease 15% to 18% compared with last year.
Positives noted during the call included positive comps and trends in certain markets, including the Southwest and the Ohio Valley. Home Depot also continues to grow market share in the heavily contested appliance market, served by Sears, Best Buy, and regional competitors hhgregg and Conn's
The development on most investors' minds has to do with the sale of Home Depot Supply. Management offered few new details about the possibility that private equity firms will get a "reduction in the $10.325 billion purchase price," which would have implications for Home Depot's plan to buy back $22.5 billion in stock. It did mention a commitment to returning the focus to its retail store base, suggesting the deal will get done at any price, but didn't offer further insight.
Home Depot is in the unfortunate position of having to increase investment in its stores during a period of industry turmoil. On Monday, Fools will know the extent of whether the challenges are industry-based or internally inflicted, because Lowe's
That could be a decent entry point, given that investor sentiment is working against Home Depot and Lowe's, and earnings are definitely being depressed based on near-term trends. When the cycle will reverse itself is anyone's guess, but I keep thinking that, with a two- to five-year investment horizon, now could be a good time to invest in a number of big-box retailers that likely will see more favorable prospects down the road. Better yet, they have already put most competitors out of business, leaving fewer options for consumers to spend their hard-earned dollars.
For related Foolishness:
- Foolish Forecast: Will Home Depot Fade or Glow?
- Fool on the Street: Talking Shop at Home Depot
- The Best Stocks for the Next 10 Years
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Fool contributor Ryan Fuhrmann is long shares of Home Depot and Lowe's but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. Best Buy is also a Motley Fool Stock Advisor recommendation. The Fool has an ironclad disclosure policy.