Housing Troubles Hit Home Depot

The home improvement giant warns earnings per share will decline by 15%-18% due to the weak housing market and the sale of a unit

By the Associated Press, with BW staff reports

The end of the housing downturn keeps fading like a mirage.

The Home Depot (HD), the world's largest home improvement store chain, warned on July 10 that its earnings will decline this year more than previously expected because of weak conditions in the housing market and the sale of its wholesale distribution business.

The Atlanta-based company said it now expects its earnings per share to decline by 15% to 18% for fiscal 2007. In May, the company had projected an earnings-per-share decline of 9% for the year.

The earlier guidance included an estimated 18¢ of earnings-per-share contribution from the company's HD Supply unit for the last six months of the fiscal year.

Home Depot shares fell 24¢ to $39.99 in pre-market activity on July 10.

Last month, Home Depot said it was selling the unit to a group of private equity firms for $10.3 billion. Home Depot said on July 10 it was updating its guidance to reflect the unit as a discontinued operation.

The company said it expects total retail sales to be down 1% to 2% for the year and sales at stores open at least a year to be down in the mid-single-digit range.

Buyback Tender Offer

The fiscal 2007 earnings-per-share targets reflect 52 weeks and do not include the impact of the 53rd week. The company will have 53 weeks of operating results in its fiscal 2007 financial results. Home Depot projects that the 53rd week will add approximately 3¢ to its consolidated earnings-per-share guidance for fiscal 2007.

The company said its updated earnings-per-share guidance does not include the gain on the sale of HD Supply.

"While we expect the housing market to remain challenging for the rest of 2007 and into 2008, we plan to continue our reinvestment plans for the long-term health of our business, understanding that it will put short-term pressure on earnings," Chief Financial Officer Carol Tomé said in a statement.

She added, "We are confident that over the long term, we will deliver productivity improvements and enhance returns on invested capital as the investments take hold."

Also on July 10, Home Depot said it was launching a tender offer for 250 million shares of its common stock at a price range of $39 to $44 per share. The tender offer is scheduled to expire on Aug. 16. Home Depot shares have been trading recently at around $40 a share.

Blog Critics Weigh In

Last month, the company announced a stock repurchase program in which its board had authorized the company to buy back up to $22.5 billion of Home Depot stock. The tender offer is part of that plan. At the midpoint of the tender offer's price range, the 250 million shares represent less than half of the value of the total stock repurchase authorization. Home Depot has said it wants to complete the stock buyback plan as quickly as possible.

Bloggers reacted to the news with a mixture of criticism and resignation. One blogger in Germany took issue with Home Depot's decision to lower guidance and buy back stock at the same time. The writer charged that the company was masking poor results with buybacks and undermining its financial strength at a critical time. "They risk their strong financial position just when the housing market is facing a long year bear market," the blogger wrote on Immobilienblasen. Others in the blogosphere said the move was understandable given the ongoing troubles in the housing market. "This should surprise no one," wrote a blogger on Bonddad.

In addition, Home Depot, which has more than 2,000 stores in the U.S., Canada, Mexico, and China, said on July 10 it will open approximately 108 new stores in fiscal 2007.

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