Home Depot Third-Quarter Protit Falls

Home Depot reports 8.9% profit drop in Q3, beats expectations

Nov 17th 2009 at

Home Depot Inc.'s third-quarter earnings fell 8.9 percent as the housing and renovation markets remained weak, the nation's largest home improvement retailer said Tuesday.

The company also raised its full-year earnings outlook as the quarter's earnings topped expectations. CEO Frank Blake said the company has seen signs of stabilization in real estate and has added market share in the quarter.

Home Depot and other home-improvement retailers have faced sales declines as consumers hold back on do-it-yourself projects amid worry over jobs and home values. Although the U.S. housing market is stabilizing, after a nearly three-year decline, home prices remain far below their peak.

On Monday, Home Depot's smaller rival Lowe's Cos. reported third-quarter profit fell 30 percent as sales declined 3 percent. Lowe's also observed that some of the hardest-hit home markets are stabilizing and said it expects this year's fourth quarter to be stronger than last year's.

Home Depot said declines in the average checkout receipt eased a bit in the quarter, falling 7.1 percent to $51.89, compared with 8.2 percent for the year to date. Falling purchases of big-ticket items like major appliances have been a particular worry for Home Depot and Lowe's.

Net income was $689 million, or 41 cents per share, for the quarter ended Nov. 1. Revenue fell 8 percent to $16.36 billion.

Analysts polled by Thomson Reuters expected a profit of 36 cents per share on revenue of $16.27 billion.

Sales at stores open at least a year fell 6.9 percent. That figure is considered a key measurement for retailers because it excludes the effect of store expansions or closings.

For the full year, Home Depot now expects earnings per share from continuing operations of about $1.50. That would be a 9.5 percent increase from last year, better than the company's previous expected range of flat to up 7 percent.

Home Depot now expects adjusted earnings of $1.55 per share for the full year. Analysts polled by Thomson Reuters expect $1.52.

EBay--The Retailer

Massucci's Take: EBay's plan to be more retailer than auctioneer is one risky bid

Anthony Massucci

EBay (EBAY) is a Web pioneer, having built a multibillion dollar business out of allowing people to essentially put garage sales on the Internet. That simple idea led to fast growth more than a decade ago and helped define what was possible online for other companies that followed. The company's IPO in 1998 turned founder Pierre Omidyar and eBay President Jeffrey Skoll into instant billionaires.

Fast-forward to 2009, and the 1990s Internet darling is steering through turbulence. EBay seems to want to be more an online retailer and less an online auction site. If it makes such a move, it will have to fight online retailers such as Amazon.com (AMZN) and Zappos and their impeccable customer service. It will also have to take on formidable brick-and-mortar retailers like WalMart (WMT) and Target (TGT), which are focusing more on online sales. Why does eBay want to join a battle it's not likely to win?EBay CEO John Donahoe said the company is moving in the right direction. "While we still have a lot more work to do to improve trust, value, and selection, we are making progress," he said, during the company's third-quarter conference call last month.

He added that eBay is emphasizing its trusted sellers, who offer fast shipping and guaranteed returns. "For the first time, buyers who come to eBay looking for fast, trusted service, can easily spot top-rated sellers by the prominent badge in search results," he said.

Customers are noticing, Donahoe said. Buyers and sellers are also seeing more sellers peddling fixed-price items, rather than items for auction, which is how eBay built its brand.

Easy Returns

I'd argue that while its important to establish more trust on eBay, which the company seems to be doing, deemphasizing auctions is a mistake. Why would you or I buy a new pair of boots on eBay for the same price as we'd buy them at Zappos, which offers returns for a full-year after the product purchase?

Granted, most people don't need to bother with returns. But if you're retuning an item to Zappos, there are instructions on how to do so on its website and a toll-free number to call if you have any questions. Walmart.com allows customers to return their items by mail or to a store.

While most items are never returned, the perception of trust and safety is underlined by the return policies. With eBay, even from a trusted seller, the perception of trust by a buyer isn't as strong.

"What Donahoe has tried to do is make it more Amazon-ish, with a greater array of fixed-price offerings," says Fred Moran, analyst at Benchmark Co. "It might be that making it more like Amazon-like is the thing that saves them and helps them restore growth."

Moran says eBay faces an uphill battle against rivals like Amazon.com. "EBay's mousetrap is not as strong. How they compete with Amazon is the right question to ask. I don't know if Donahoe has the answer." Moran has a hold rating and a $29 price target on eBay shares, which is just a 22% increase over Friday's closing price of $23.74.

Search Snafus

Investor Sandi Lynne says that while eBay's Internet payment service PayPal is adding revenue and the company is selling off its Web-calling service Skype, eBay needs to focus on improving the search function on its site. "If I'm searching for something specific, it gives you too much stuff in addition to what you asked for," says Lynne.

When she searched for a Mercedes X600 on eBay Motors, she got the Mercedes emblem, the wheel rims, the original owners manual, yet she wanted only a list of the available cars. "That's why eBay is doing worse than ever before," she said. "The more you try to refine the search, the more likely you are to have it tell you your search yielded no results. Amazon's search is the opposite."

The more eBay morphs into an online retailer and gets away from its roots as an online auction site, the more likely it's fighting a battle it's going to lose. While it's important to establish trust among sellers and buyers on eBay, trying to compete with Amazon or Walmart and their online guarantees is a waste of time. Even if eBay can match the services offered by other retailers, why would a buyer choose to shop there?

EBay's strengths are in the variety of old, hard-to-find collectible and discounts on new items. That's why people shop at eBay, and if the company moves too far away from that core identity, it may never rediscover its mojo.

Retail Sales Performance

The week in preview: More retail earnings: Gap, Home Depot, Sears, Target ...

On the heels of last week's better-than-expected earnings results from retailers Abercrombie & Fitch Co. (ANF), Kohl's Corp. (KSS), Macy's Inc. (M), Urban Outfitters Inc. (URBN) and Wal-Mart Stores Inc. (WMT) -- as well as disappointing numbers from Blockbuster Inc. (BBI) and JCPenney Co. Inc. (JCP) -- the coming week will bring results from more shopping- and strip-mall favorites.

TJX Companies Inc. (TJX), which operates T.J. Maxx and Marshalls stores in the U.S., settled a class action, announced share buybacks and raised its guidance in the third quarter. For the three months that ended in October, analysts surveyed by Thomson Reuters expect TJX to report earnings of $0.80 per share, up from $0.57 in the same period of last year. Revenue is expected to total $5.3 billion, or 10.2% higher than a year ago. So far, the full-year forecast is for a profit of $2.59 per share (+22.3%) on $20.0 billion (+5.5%) in sales.

This dividend payer's earnings have met or beat consensus estimates in the past five quarters. The long-term EPS growth forecast is 13.0%, which is better than the sector average, and its earnings multiple is 14x. TJX had more cash on hand than long-term debt at last report, and its net cash flow from operations has grown in recent quarters. The First Call consensus recommendation has been to buy TJX for more than 90 days, and the mean price target is $44.07. Analysts see TJX doing well in the upcoming holiday season. Shares have pulled back from a recent multi-year high of $40.64 and closed Friday at $38.98, which is 10.2% higher than three months ago.

In its third quarter, San Francisco-based purveyor of khaki, The Gap Inc. (GPS), celebrated its 40th anniversary, saw the death of co-founder Don Fisher, and declared a quarterly dividend. Analysts are looking for Gap to report that its profit grew 20.5% from a year ago to $0.44 per share. But sales for the period that ended in October are expected to come to $3.6 billion, about the same as a year ago. The forecast is for modest year-over-year growth in the fourth quarter in both EPS and revenue. Gap has topped earnings expectations by a penny per share in the past five quarters, and the long-term EPS growth forecast is 11.5%, which is better than that of competitor Abercrombie & Fitch Co. Gap's earnings multiple is 14x, and the consensus recommendation remains to buy GPS. One analyst recently downgraded GPS though, citing potential risk. The mean price target is $25.43. Shares closed at $22.42 Friday; they have traded between $21 and $23 since early September.

Analysts are looking for more modest growth from Target Corp. (TGT). For the third quarter in which the Minneapolis-based retailer opened 26 new stores, entered a price war with Walmart and Amazon.com Inc. (AMZN), and declared a quarterly dividend, the consensus forecast is for earnings of $0.50 per share on revenue of $15.3 billion. That compares with $0.49 per share on $15.1 billion in the year-ago period. Analysts so far expect to see stronger year-over-year growth in both EPS and revenue in the fourth quarter. Target has only missed the Street view on earnings in one of the past five quarters, and then only by a penny per share. The long-term EPS growth forecast is 13.7%, which is better than that of Walmart and Sears (see below). Target's earnings multiple is 14x, and its net cash flow from operations has grown in recent quarters. Analysts, on average, recommend buying TGT, with a mean price target is $56.88. Investopedia expects Target's results to be in line with expectations. Shares have retreated from the 52-week high of $51.77 back in October and closed Friday at $48.99.

Other retailers expected to report earnings growth this week include Ann Taylor Stores Corp. (ANN), Buckle Inc. (BKE), Children's Place Retail Stores Inc. (PLCE), Gymboree Corp. (GYMB), Ross Stores Inc. (ROST) and Shoe Carnival Inc. (SCVL), while Kirkland's Inc. (KIRK) is forecast to have swung to a profit.

For Home Depot Inc. (HD), the world's largest home improvement chain, expectations are lower. The Atlanta-based big-box retailer launched its Martha Steward brand and power drill exchange, as well as declared a quarterly dividend, in the third quarter. Earnings are expected to have fallen 20.0% from a year ago to $0.36 per share. And sales for the three months that ended in October are expected to be 8.4% lower to $16.3 billion. The full-year forecast is for net income of $1.52 per share (-14.6%) on $65.3 billion (-8.4%) in sales. But Home Depot has topped earnings estimates in the past five quarters, by as much as 10 cents per share. Its long-term EPS growth forecast is 10.1% and its earnings multiple is 17x, both of which are about the same as those of rival Lowe's Companies Inc. (LOW). But analysts, on average, still recommend buying HD, and the mean price target is $29.89. The Motley Fool called HD as a stock ready to run. At $27.34, shares are a down a bit from three months ago, and they have faced resistance around $28.00 since early August.

Other retailers expected to report lower earnings this week include BJ's Wholesale Club Inc. (BJ), Foot Locker Inc. (FL), Hot Topic Inc. (HOTT) and Zumiez Inc. (ZUMZ).

Sears Holdings Corp. (SHLD) is expected to be this week's hard luck story, with analysts anticipating a deeper loss. In its third quarter, Sears opened in-store toy stores, launched Christmas Club cards, and offered early Black Friday deals ahead of the holiday season, as well as saw a new member on its board. The Hoffman Estates, Ill.-based retailer is expected to report a net loss of $1.09 per share on revenue of $9.9 billion. That compares with a loss of $0.90 per share on $10.7 billion in sales in the same period of last year. For the fourth quarter, analysts expect lower year-over-year earnings and sales. But results have been better than expected in two of the past three quarters, and the long-term EPS growth forecast is 10.0%, which is better than that of JCPenney. Zacks downgraded SHLD due to stiff competition that could undermine its growth prospects. Shares are 4.9% lower than three months ago, when they were trading near the 52-week high of $79.35.

Bon Ton Stores Inc. (BONT), Casual Male Retail Group Inc. (CMRG), Limited Brands Inc. (LTD) and Saks Inc. (SKS) are also expected to report net losses this week.