Citing Weak Housing Market, Home Depot and Sears Lower Estimates on Home Services

Dec

Citing Weak Housing Market, Home Depot and Sears Lower Estimates

posted by admin in Home Depot

Retailers are starting to feel the effects of the housing slump, with two big-name merchants announcing yesterday that they were cutting back their forecasts for profit over the next few months as sales of home improvement items fall and consumer confidence weakens.

Home Depot, the worlds largest home improvement store, and Sears Holdings, the biggest department store company in the country, said they expected second-quarter net income to drop far more than they anticipated just two months ago.

Home Depot, based in Atlanta, said its earnings per share would decline by 15 to 18 percent for the fiscal year. In May, the company estimated a 9 percent decline, but that was before it announced the sale of its contractor supply company, HD Supply.

Sears, which also runs Kmart, has been recording shrinking sales since it united with the struggling discount chain in 2005. The company, based in Hoffman Estates, Ill., said it expected net income to be $160 million to $200 million. In the corresponding period last year, net income was $294 million.

Home Depot blamed a weakening housing market and the sale of its contractor unit. Sears acknowledged that it needed to become more relevant to its customers and to do more to control its costs. Analysts said both companies were the victims of the sluggish housing industry.

Consumers have the money in their pockets, but they are just not spending it, said Markus Schomer, a global economic strategist at AIG Investments, because they see the negative headlines about the housing market, and they are scared.

Mr. Schomer said the climate was supportive for a robust economy.The main drivers of spending, job growth and income growth, remain relatively stable. And last month, the Commerce Department reported strong retail sales in May, reflecting an expanding economy.

But mortgage rates have been rising and the troubles in the subprime mortgage business, which gave loans to people with poor credit, have become more widespread. Reports about delinquencies and foreclosures have made consumers more reluctant to spend money, he said.

The retail sales report for June will be released on Friday, and analysts and others are predicting a decrease in spending. This appears to be a spillover effect from the downturn in the housing market,said James Osullivan, an economist from UBS.

A slumping housing industry affects consumer spending in more ways than one, he said. Not only are consumers less willing to shop, they are also hesitant to do home repairs and buy appliances.

Sears said sales at Kmart stores, a leader in tools, home appliances and lawn and garden equipment, declined across most categories, except for a small increase in purchases of womens apparel and footwear. Home appliance sales fell more sharply than most other categories.

Although we believe our business has suffered from many of the same factors that have led other retailers to announce disappointing results and lowered expectations, Aylwin B. Lewis, Sears Holdings chief executive, said in a news release, our recent performance underscores our ongoing need to become more relevant to consumers while improving our discipline around expense management.

Though Home Depot forecast a sales decline of as much as 2 percent and a revenue drop in the mid-single digits, the company said it would continue with plans to open 108 stores this fiscal year.

While we expect the housing market to remain challenging for the rest of 2007 and into 2008, we plan to continue our reinvestment plans, Carol B. Tome, the chief financial officer and executive vice president for corporate services at Home Depot, said in a news release.

Both retailers plan to buy back some of their stock. Last month, Home Depot announced a buyback valued at $22.5 billion. Yesterday, the company announced an offer to buy as many as 250 million shares for $39 to $44 apiece.

Sears said yesterday that it would repurchase an additional $1 billion in shares.

Analysts forecast more sales declines from retailers as the softness in housing continues.