AP News

Home Depot sees signs of improving housing market


ATLANTA (AP) — The Home Depot Inc. is feeling more optimistic about the recovery of the housing market after customers spent more on sprucing up their homes in the second quarter.

The country's biggest home-improvement retailer said Tuesday that strong cost controls and healthy sales of paint, bathroom accessories and kitchen installations helped lift its net income by 12 percent during the period.

The Atlanta-based company boosted its full-year outlook, citing its performance so far this year.

In a conference call with investors, Chairman and CEO Frank Blake noted that some of the strongest growth in the latest quarter came from the markets that were hit hardest in the downturn, such as California and Florida.

"These are encouraging signs of stabilization in the housing market," Blake said.

He also noted that the housing market is now a contributor to the country's gross domestic product, rather than a drag. Another positive sign for Home Depot: the Commerce Department said Tuesday that Americans boosted their spending at retail businesses in July by the largest amount in five months, as spending increased on furniture and building materials, among other items.

Still, the housing market is still a long way from returning to its heyday before the recession. Home Depot's net sales in the quarter rose just 2 percent from a year ago and came in short of Wall Street expectations. And although the company lifted its earnings-per-share forecast, it didn't update its outlook that sales for the year would grow by 4.6 percent.

When the housing market is weak, companies such as Home Depot struggle because new construction slows and contractors don't spend as much on supplies. Homeowners also pull back on projects, such as kitchen or bathroom renovations.

Although customers still aren't spending as much on their homes as during the housing bubble, Home Depot said it saw signs of improvements in key areas.

Overall, revenue at stores open at least a year rose 2.1 percent, which was slower than the 4.3 percent growth last year. The company noted that the warm winter pulled sales of many seasonal items, such as gardening products, into the first quarter.

In the U.S., where the majority of Home Depot's stores are located, the figure rose 2.6 percent. The metric is a key gauge of a retailer's health because it strips out the impact of recently opened or closed locations.

Transactions of $900 or more, which make up about 20 percent of U.S. sales, rose 3.4 percent in the quarter, as appliance, kitchen and flooring sales increased. Transactions of $50 or less, which also make up about 20 percent of sales, were down 0.7 percent.

The company attributed the decline to the sales of seasonal items into the first quarter.

Brian Sozzi, chief equities analyst with NBG Productions, noted that the improvement in sales of bigger-ticket items suggests consumers are opening up to the possibility of larger projects, such as redoing their cabinets. They're also spending on other items.

"People are buying lawn mowers and other items they weren't necessarily buying in 2010 or 2011, when they just didn't want to put that on their credit cards," he said.

Home Depot's total operating expenses also eased to $4.46 billion during the quarter, down 3 percent from a year ago. The improvement was partly the result of tight cost controls and a new regulation that caps the amount banks can charge retailers when customers pay with debit cards.

In the second half of the year, however, Home Depot expects expenses to rise as it spends on new call centers and other operational improvements.

Looking ahead, Home Depot now expects fiscal 2012 earnings of $2.95 per share, up from the $2.90 per share it previously forecast. Revenue is still expected to rise 4.6 percent, implying $73.63 billion.

Analysts expect earnings of $2.92 per share on revenue of $73.95 billion.

Home Depot runs more than 2,200 stores. Its smaller rival Lowe's Cos. reports its earnings Monday.

Shares of Home Depot rose $1.89, or 3.6 percent, to close Tuesday at $54.71.


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