Home Depot Profit Falls 15% on Weak Housing Market

Wilfredo Lee / AP Customers wait to enter a Home Depot store in Fort Lauderdale, Fla., Tuesday, Oct. 25, 2005.

Home improvement retailer Home Depot said second-quarter net income fell 15% as sales suffered amid the weak U.S. housing market.

Home Depot

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[HD  Loading...      ()   ] said it continues to hold talks to sell its supply business, but the company raised the possibility that the sale might not go through, which could derail its stock buyback plan.

Home Depot said it still expects per-share profit to decline as much as 18% this year.

Earnings for the quarter ended July 29 fell to $1.59 billion, or 81 cents a share, down from $1.86 billion, or 90 cents a share, a year ago. Earnings from continuing operations, which do not include the wholesale supply business it agreed to sell, were 77 cents a share.

Analysts surveyed by Thomson Financial predicted a profit of 72 cents a share.

Sales fell 1.8% to $22.2 billion, the company said, reflecting a 5.2% decline in same-store sales, offset in part by sales from new stores. Analysts were predicting overall sales of about $22 billion.

"The second-quarter numbers were actually higher than I expected them to be, and I’m happy with them," Richard Hastings, senior retail analyst at Bernard Sands, told "Squawk Box." "I was concerned about the trends in the year-on-year basis and we are watching them closely."

Caution Ahead

Home Depot  Chairman and CEO Frank Blake said the results were in line with the company’s expectations, but future performances will depend on the housing market.

"We believe the housing and home improvement markets will remain soft into 2008," Blake said in a statement. "We will continue to invest thoughtfully for the long-term health of the business."

The company reiterated that consolidated earnings per share are expected to fall by 15% to 18% for fiscal 2007, while earnings per share from continuing operations are likely to decline by 12% to 15%.

The company also said again it "is carefully watching today’s turbulent financial markets" with respect to the sale of HD Supply to Bain Capital Partners, The Carlyle Group and Clayton, Dubilier & Rice.

In June, the retailer announced an agreement to sell the supply division, which provides materials to home builders and other contractors, to private equity groups for $10.3 billion. But Home Depot announced last week that the deal was being renegotiated.

Home Depot Chief Financial Officer Carol Tome told a conference call with analysts that the stock repurchase program may be cut by nearly half if the deal to sell the supply division falls through.

"If we have no proceeds from HD Supply ... our recap would be reduced to $12 billion," Tome was quoted by AP as saying.

The supply business, accounted for as a discontinued operation, had earnings of $66 million, or 3 cents a share, in the second quarter, down from $161 million, or 8 cents a share, a year earlier. But including a tax charge of about $60 million, the unit's adjusted earnings for the latest quarter were $126 million.

Shares in Home Depot are currently trading 3.4% lower, at $34.04.