Home Depot quarterly profit drops with home sales slump

Home Depot hd, the world's largest home-improvement retailer, said Tuesday that fourth-quarter profit fell, and it forecast earnings below analysts' estimates after the deepest housing slump in a quarter century showed no sign of receding.

Net income dropped 27% to $671 million, or 40 cents a share, the company said. Profit trailed analysts' projections by 3 cents a share. Home Depot shares rose 1 cent after falling 29% in the past year.

Sales, which dropped for the first time ever last year, will fall as much as 5% during a "challenging" 2008, CEO Frank Blake said in a statement. Home Depot has lost market share to Lowe's as both companies have struggled with falling U.S. home values and sliding consumer confidence.

"Since they took a healthy haircut to earnings and didn't build in any improvements from rebates, they're in a good position to exceed the low expectations they've set," says analyst Sarah Henry of MFC Global Investment Management.

Earnings per share from continuing operations will decline 19% to 24% for the year that ends in February 2009, Home Depot projected.

Home Depot stock climbed 1 cent to close at $28.83. It's the second-worst-performing stock in the Dow Jones industrial average in the past year.

Fourth-quarter operating income fell 14% to $1.25 billion as selling, general and administrative costs rose 8.8%. As a result, operating margin, or operating income as a percentage of sales, narrowed to 7.1% from 8.4%.

"Everyone knows the housing market is bad, but the deterioration in margin was not hugely expected," says Walter Todd of Greenwood Capital.

The average transaction price fell 2.3%, to $54.96, as shoppers curtailed large purchases.

Fourth-quarter sales in stores open at least a year fell 8.3%. For the year, they dropped 6.7%, the second-straight decline. Revenue fell 2.1% for the year, to $77.3 billion.

Blake said one indicator of home-improvement spending — private residential construction as a percentage of gross domestic product — is near bottom, which "gives at least some cause for cautious optimism as we look out through 2008 and into 2009."

Lowe's low said Monday that fourth-quarter profit fell as sales at stores open at least 13 months fell 7.6%.