Two Giant Retail Chains Say Sales Are Slumping on Home Services

Jan

Two Giant Retail Chains Say Sales Are Slumping

posted by admin in Home Depot

Wal-Mart and Home Depot sneezed yesterday. Will the economy catch a cold?

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Sandy Huffaker/Bloomberg News

Home Depot said its earnings for the year would fall because of the weak housing market, a forecast that alarmed Wall Street.

The two companies, the nation largest retailers and bellwethers for consumer spending, reported earnings disappointments for the second quarter and predicted an even bumpier year ahead because of higher energy costs and a sagging housing market.

The sober forecasts reverberated across Wall Street, sending the Dow Jones industrial average and the Standard Poor 500-stock index down by nearly 2 percent, with the Dow dropping more than 200 points. Shares of both Wal-Mart and Home Depot fell around 5 percent.

Home Depot also said that the proposed sale of its supply business, for $11 billion, could fall through because of trouble in the credit markets, potentially forcing the retailer to shrink a $23 billion stock buyback.

Economists said the sluggish performance of the chains Wal-Mart missed its profit forecast and Home Depot earnings dropped %26#151; could signal broader troubles in the economy.

It a red flag,said Jay Bryson, global economist at Wachovia. If consumer spending starts to weaken, the overall outlook for economic growth will diminish.

That, Wal-Mart executives said, is precisely what has begun to happen in its 4,000 United States stores over the last three months even after the chain cut prices on 16,000 products this summer.

Many customers are running out of money at the end of the month,said H. Lee Scott Jr., the chief executive of Wal-Mart.

Home Depot chief executive, Frank Blake, described a tough selling environment and warned that the housing and home improvement markets would remain weak into 2008.

But Wal-Mart also blamed itself, for poor clothing and home cor products. And Home Depot has alienated customers with lackluster service, making it difficult to discern how much of the slowdown was self-inflicted damage and how much was tied to larger economic forces.

For the second quarter, which ended Aug. 3, Wal-Mart missed its profit estimate and those of Wall Street analysts, a rarity for the company, whose performance is generally the envy of the industry. Earnings from continuing operations were 72 cents a share, below the company forecast of at least 75 cents. Even so, sales rose 8.8 percent, to $92 billion.

Net income rose 49 percent, to $3.1 billion, or 76 cents a share. But that figure included 4 cents a share in one-time gains like lower workers compensation claims.

Although some people will report that Wal-Mart has had record sales and earnings, our underlying operating performance this quarter was not what we expect of ourselves, and not what our shareholders expect of us,Mr. Scott said.

For the year, Wal-Mart said it would earn $3.05 to $3.13 a share from continuing operations, lower than its original forecast of $3.15 to $3.23.

Mr. Scott said Wal-Mart shoppers, who generally earn less than $40,000 a household, are under difficult pressure economically.

He added that the paycheck cycle is more pronounced now than ever before, meaning that customers are left with little cash by the end of the month.

Wal-Mart has lowered prices across its stores to appeal to such customers, but the strategy has hurt its profit margins. Sales of grocery items, electronics and pharmacy items rose in the second quarter, but clothing and home products which sell at a higher profit margin did not.

Charles Grom, an analyst at JPMorgan, downgraded Wal-Mart stock yesterday, saying its second-quarter earnings were creating a slippery slope for Wal-Mart to climb.

Wal-Mart lowered outlook, Mr. Grom wrote, is more than just resetting the bar this morning. Rather, the company and this management has suffered a credibility blow that will take time to overcome.

Wal-Mart shares fell $2.35, more than 5 percent, to close at $43.82 yesterday.

At Home Depot, second-quarter income fell 14.8 percent, to $1.6 billion, or 81 cents a share, compared with the quarter last year. Sales fell 1.8 percent, to $22.2 billion, while sales at stores open at least a year, a key measure in retailing, fell 5.2 percent.

The housing market remains difficult, and our performance reflects that,said Mr. Blake, the chief executive. He noted, for example, that housing starts so far this year were down 22 percent, compared with a year ago, and existing-home sales were down 12 percent.

Home Depot said its earnings for the year would fall 15 to 18 percent, confirming an earlier forecast. Nevertheless, the company will invest in its stores, giving employees bonuses and remodeling aging outlets to better compete with Lowe, its biggest rival.

Executives said they were restructuring the deal to sell Home Depot supply division, a $12 billion business, to three private equity groups, which could result in a lower sales price. The original price for the division was $10.3 billion. As the home construction market has slowed, the supply business has suffered, which may explain why the buyers want to renegotiate the price.

If the sale price is lowered or the deal for Home Depot Supply collapses, Home Depot said it would most likely cut back its share repurchase program, which calls for the company to buy $22.5 billion worth of company stock.