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HD, Lowe’s profit in Q2, remain cautious

May through July is the busiest selling season of the year for both Home Depot and Lowe’s, where comps increased 1.7% and 1.6%, respectively.

The Home Depot and Lowe’s managed to post comparable-store sales gains and better profits for the second quarter, but both were cautionary about the outlook for their operations, conceding that economic recovery in the housing industry is further off than they anticipated.

Atlanta-based Home Depot posted net earnings of $1.2 billion, or 72 cents per diluted share, in the second quarter of fiscal 2010, versus $1.1 billion, or 66 cents per diluted share, in the 2009 period.

Sales were $19.4 billion, a 1.8% increase from the second quarter of 2009, while comparable-store sales gained 1.7% overall and 1.0% in the United States.

From a geographic perspective, 70% of Home Depot’s top 40 markets returned positive comps. However, markets in the Pacific Northwest slipped compared with the first quarter, CEO Frank Blake said in the company’s second-quarter conference call, with Portland and Seattle suffering negative comps. Home Depot’s Canadian business was flat, while comparable-store sales in Mexico were positive.

As for product performance, Blake said gardening sales shifted into the first quarter, weakening returns in the second. For the first half of the year, though, sales for the department fell in line with expectations.

Lumber, electrical lighting and plumbing were among the strongest second-quarter performers, turning in comparable-store sales above the company average. Kitchens and flooring performed at that average, while hardware and paint posted sub-par but positive comps. Millwork, seasonal and building materials lagged.

Overall, said Craig Menear, Home Depot executive VP merchandising, the company’s U.S. market share improved by 28 basis points on a 12-month rolling basis.

Blake said that the effects of supply chain enhancements and improved merchandising analytics that have helped with seasonal product throughput efficiency have bolstered sales in a tough economic environment. Customer services initiatives, including a version of the customer FIRST (find, inquire, respond, solve, thank) program for pro shoppers, also have buoyed Home Depot results.

Blake pointed out that Home Depot opened its 15th rapid deployment center in the second quarter and its 16th in the third. RDCs now serve 80% of the company, with the goal being 100% full coverage by year’s end. RDC expansion should boost sales by curtailing out-of-stocks and create a more cost-efficient product flow to stores.

While the company raised its earnings per share guidance for fiscal 2010 by 2 cents, including the impact of stock buybacks thus far in the year, it cut a sales increase estimate from 3.5% to 2.6%.

The slackening demand Home Depot sees in the year’s second half relates largely to housing market activity that is softer than the retailer expected.

“We still see weakness in our pro segment,” Blake said. “We had anticipated that we would start to see growth in our pro customers as we moved into the second quarter, and based on that we thought we’d see gradual improvement in our average ticket. We’re now forecasting modest to flat improvement on the pro side, which puts pressure on average ticket.”

Similarly, in its recent conference call, Lowe’s executives attested that the company’s outlook had been clouded by weakness in the housing sector. A rebound that it expected to begin early in 2011 now may not become evident until the middle of next year, said Lowe’s CEO Robert Niblock.

Not only that, but he said an economy that is “bouncing along on the bottom” is increasingly discouraging consumer spending. The darker outlook from Lowe’s comes after its assessment of prospects had turned decidedly sunny in the first quarter.

Then, the company was anxious to discuss the expansion of staff—including project specialist exteriors and district commercial account specialist positions—dedicated to more aggressively selling major products and services to consumer and commercial customers. While that expansion of such initiatives continues, Mike Brown, executive VP operations, noted that Lowe’s also is placing emphasis on training staff to aid consumers wavering between more ambitious projects and basic maintenance.

Niblock said that consumers have been shopping as if in response to economic news, initiating more ambitious projects when prospects improved early in the year, but pulling back when indicators fell. Lowe’s market research determined that consumers continue to plan a wide range of home improvement products through the remainder of the year but that about half are discretionary. The concern is that, without an improvement in economic indicators, consumers won’t launch those projects or, at best, will initiate significantly scaled-down, maintenance-oriented versions. In doing so, consumers would return to the pattern of purchasing they adopted in the recession.

Q2 STATS


Source: company reports
  Home Depot Lowe’s
Sales ($mil.) $19,400 $14,400
%change +1.8 +3.7
Earnings ($mil.) $1,192 $832
%change +6.8 +9.6
Comps +1.7 +1.6
Stores 2,244 1,724

In the second quarter, Lowe’s posted net earnings of $832 million, or 58 cents per diluted share, versus $759 million, or 51 cents per diluted share, in the year-earlier period.

Sales were $14.4 billion, a 3.7% increase from the second quarter of 2009, while comps gained 1.6%.

Lowe’s reported strong sales in Florida, the Northeast and Arizona but weak returns from Gulf Coast markets. The East and Midwest struggled but advanced in some sales categories. Comparable-store sales in Canada gained 2.4%. Chris Ahearn, a Lowe’s spokeswoman, said the company has not broken out figures for Mexico.

In the heat-stressed Midwest and East particularly, outdoor living categories, such as nursery, suffered diminished sales, while air conditioners and fans gained. Overall, appliances performed well, driven by state rebate programs. Also, lumber, tools, rough plumbing, rough electrical, windows and walls, home organization, seasonal living and home environment saw better-than-average sales, according to Lowe’s.

By second quarter’s end, Lowe’s had improved its competitive position, Niblock asserted.

“We remain committed to driving profitable market share gains,” he said. “On a rolling four-quarters basis, we gained 50 basis points in total store unit market share with gains in 12 of our 20 product categories.”

While acknowledging that Lowe’s beat her earnings estimate in the quarter, Citigroup analyst Deborah Weinswig, in a research note, expressed surprise that comparable-store traffic was down half a percentage point. She cautioned that this suggested management’s guidance for 2% comp gains in the second half of 2010 might be “aggressive.”

In contrast, she said gains in comp traffic were a positive for Home Depot, which also produced advances in EBIT margins from its merchandising, supply chain and technology initiatives. She raised her earning estimate, as a result, to $1.95 for the fiscal year, above Home Depot’s revised top end of $1.90.

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