Home Depot sees deeper profit drop on housing woes

ATLANTA, July 10 (Reuters) - Home Depot Inc. (HD.N: Quote, Profile, Research) on Tuesday forecast a deeper profit drop for 2007, citing weakness in the U.S. housing market.

The home improvement industry leader said it expected per-share profit for the full year to fall 15 percent to 18 percent to a range of $2.30 to $2.36 per share. In May, Home Depot had said earnings per share would fall 9 percent this year.

The company earned $2.79 per share in fiscal 2006.

Home Depot's revised outlook reflects the recognition of its supply business, which provides building materials to contractors, as a discontinued operation. That unit is set to be sold later this year for $10.3 billion to private equity firms.

"Housing turnover continues to slow and prices continue to come down," said Keith Davis, an analyst with Farr Miller Washington, which owns Home Depot stock. "People aren't spending the way they had been on home improvements."

Home Depot said it expected 2007 total retail sales to decline by 1 percent to 2 percent and same-store sales to fall by mid-single digits. Previously, Home Depot had forecast full-year sales growth of 0 percent to 2 percent.

Stripping out a contribution by the HD Supply business, the company's earlier forecast had estimated a 15 percent decline in full-year profit to $2.36 per share.

Home Depot Chief Financial Officer Carol Tome said in a statement that although the chain expects the U.S. housing market to stay challenging into 2008, "we plan to continue our reinvestment plans for the long-term health of our business, understanding that it will put short-term pressure on earnings."

LOWER HOME SALES

Results at Home Depot and rival Lowe's Cos. (LOW.N: Quote, Profile, Research) have weakened over the past year as the U.S. housing market slowed. Sales of new and existing U.S. homes fell in May and the number of unsold homes on the market rose, according to government and industry reports.

"The guidance is lower than anticipated, but I think that really shows how deep this housing downturn is," said Bill Schultz, chief investment officer for McQueen, Ball & Associates.

Home Depot said it was launching a tender offer for 250 million shares for between $39 and $44 per share, or up to $11 billion. The tender offer is set to expire on Aug. 16.

In June, the retailer's board authorized a $22.5 billion increase in its stock repurchase program.

"They're doing this tender offer to support the stock because if you do get a turnaround in housing, it's a relatively inexpensive stock to own," Schultz added.

Davis, the Farr Miller analyst, said smart investors want to see Home Depot keep investing in store improvements. The retailer is boosting capital spending by 29 percent this year to maintain stores and recruit skilled trades staff.

Home Depot has "lost share to Lowe's and its due to the fact that it hasnt been investing back in the existing store base," Davis said. "They view their best opportunity right now as improving their competitiveness."

Home Depot said it plans to open about 108 new stores this fiscal year but added that operating margin would decline by 1.5 percentage points because of the negative same-store sales and investments in its operations.

Home Depot, a component of the Dow Jones industrial average (.DJI: Quote, Profile, Research), was up slightly to $40.66 in electronic trading before the bell from its Monday close of $40.23 on the New York Stock Exchange.
((Reporting by Karen Jacobs and Nick Zieminski, editing by Dave Zimmerman))