Tougher Times for Home Depot, Sears

The retailing giants issued disappointing outlooks Tuesday, as the housing slump crimps sales

Two of the world's biggest retailers warned investors of lower sales and a disappointing earnings outlook on Tuesday. But only one chain's stock took a hit.

Sears Holdings Corp. (SHLD) said same-store sales fell at its Kmart chain by 3.9%. Sears domestic same-store sales fell 4%. Even worse, the firm said it expects earnings to be in the range of $1.06 to $1.32 per share in the second quarter. That's nearly half analysts' previous estimates. Sears also announced it was setting aside $1 billion to buy back company stock, but that did little to reassure investors. The stock was trading almost 7% lower by midmorning.

Investors needed higher math to figure the impact of Home Depot's (HD) news on Tuesday. On the minus side, the store says earnings per share in fiscal 2008 will be down 15 to 18%. Total retail sales will be down 1 to 2%, and a decline in comparable store sales will be in the mid-single digits.

However, on the plus side, Home Depot is planning to buy back up to 250 million shares at prices of $39 to $44 per share. That's a total outlay for the company of $9.75 billion to $11 billion, and represents more than 12% of shares outstanding.

Also on the plus side, much of the revenue decline is due to the sale of its HD Supply division for $10.3 billion to a private equity firm. Analysts and sophisticated investors had expected the sale would hurt sales and earnings figures. The proceeds will help fund the stock buyback, and fewer shares outstanding will translate to higher earnings per share.

But the HD Supply sale doesn't explain all of Home Depot's profit and sales declines. The company expects to be hurt by "weaker conditions in the housing market," too.

Investors reacted to all this news by pushing Home Depot sales more than 1% higher, to $40.66 by midday.

Goldman Sachs analyst Matthew Fassler wrote "Home Depot's guidance cut is modest in the grand scheme." The stock buyback exceeded market expectations, he added. (Home Depot is a Goldman Sachs client.)

The stock market's reaction may represent a confidence in Home Depot's long-term strategy. One reason earnings are lower is investment Home Depot is making to add staff and improve stores.

The housing market may remain tough into 2008, chief financial officer Carol Tome said in a statement. However, "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," Tome said.

Standard & Poor's analyst Michael Souers expects the housing market to bottom out in late 2007. Once it does, he wrote recently, Home Depot "will reap the rewards from an accelerated focus on customer service."

At Sears, by contrast, the earnings numbers raise questions whether attempts to revive the Kmart and Sears brands are working. Credit Suisse analyst Gary Balter wrote Tuesday's developments "raise some major issues as to the viability of the turnaround efforts." (Credit Suisse seek banking business with Sears.)

S&P analyst Jason Asaeda said Sears' woes are a combination of two factors. First, it's "a challenging environment" for all stores that serve the lower-end consumer, who is especially hurt by high gas prices. Kmart rivals like Wal-Mart are also seeing weak sales.

Second, Sears and Kmart haven't found a winning strategy to revive shopper interest. While rivals make major investments to remodel stores and introduce new brands, Sears Holdings is still testing out different approaches. "It will probably take a little time for them to get it right," Asaeda said.

There is one bright spot. Asaeda notes that sales of women's apparel and footwear at Sears increased, a sign that at least some new sales tactics are paying off. (S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies [MHP].)