Home Depot disappoints Wall Street

Is this an economic hiccup or a sign of troubles to come?

By Jonathan Berr May 15, 2012 12:20PM
Image: Woman Using a Spirit Level on a Sink in a Domestic Bathroom (© Alex Wilson/Digital Vision/Getty Images)Shares of Home Depot (HD) were down Tuesday on disappointing quarterly results as consumers put off large projects amidst concerns about the strength of the economic recovery.

Net income at the largest home-improvement retailer rose 27% to $1 billion, or 68 cents a share, from $812 million, or 50 cents, a year earlier. Revenue rose 5.9% to $17.8 billion. Wall Street had expected earnings of 65 cents on revenue of $17.93 billion.

Home Depot also said sales this year will rise 4.6%, below the 5.3% gain forecast by analysts. Full-year earnings are expected to be $2.90 a share, below the $2.91 Wall Street consensus.

Home Depot's woes are not unique. Last week, Kohl's (KSS) and Macy's (M) disappointed investors. All eyes are now on Wal-Mart (WMT), the world's largest retailer, which reports results Thursday. Expectations are high for the Bentonville, Ark., company. Wall Street expects earnings of $1.04 on revenue of $110.5 billion. However, the company probably can't escape the economic pressures that resulted in April sales showing the weakest gains of the year.

Investors may be concerned that the results of these companies were inflated by warmer-than-expected spring weather. Indeed, new claims for unemployment recently rose to the highest level since January, and so many people have given up looking for work that the unemployment rate dropped to 8.2%. 

However, I'm not yet ready to throw the towel in yet. Though the economy is slowing, which is not surprising given the weakness in Europe among other reasons, the recovery remains on track. For instance, consumer sentiment is still strong. In May it reached its highest level in four years. That was evident at Home Depot, where people spent $54.51 per visit in the quarter, up 2.2% from 2011.

Other economic indicators, such as housing permits, are doing well too. In March, the number of housing permits hit the highest level in more than three years, even though new housing starts slumped. Depressed housing markets, such as Detroit, continue to show signs of life. Mark Zandi, chief economist at Moody's Economy.com, recently declared that the housing market had bottomed after six years of declines.

U.S. companies reported better earnings than expected in the first quarter. "They're beating Wall Street estimates at the best rate in more than a decade," according the Associated Press. "U.S. corporations excluding banks and other financial firms are sitting on more than $2.2 trillion in cash, up from $1.7 trillion in 2009. That surplus means they can afford to expand and hire whenever they're confident enough."

The key question is: What it will take for corporate America to believe that tomorrow will be better than today? Conservatives like Mitt Romney, the presumptive GOP presidential nominee, argue that lowering taxes on  businesses will do the trick. I believe that view is simplistic.

One thing is for sure. The economy is much weaker than President Obama, or anyone else, would like. I am not saying that as Home Depot goes so does America, but it's awfully close.

 Jonathan Berr is long Wal-Mart. Follow him on Twitter@jdberr.



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