2Q profits decline at Wal-Mart, Home Depot

The Baltimore Sun

Wal-Mart and Home Depot sneezed yesterday. Will the economy catch a cold?

The two companies, the nation's largest retailers and bellwethers for consumer spending, reported earnings disappointments for their fiscal second quarters and predicted an even bumpier year ahead because of higher energy costs and a sagging housing market.

The sober forecasts reverberated across Wall Street, sending the Dow Jones industrial average and the Standard & Poor's 500-stock index down by nearly 2 percent. Shares of both Wal-Mart and Home Depot fell about 5 percent.

Home Depot also said that the proposed sale of its supply business, for $11 billion, could fall through because of trouble in the credit markets, potentially forcing the retailer to shrink a $23 billion stock buyback.

Economists said the sluggish performance of the chains - Wal-Mart missed its profit forecast and Home Depot's earnings dropped - could signal broader troubles in the economy.

"It's a red flag," said Jay Bryson, global economist at Wachovia. "If consumer spending starts to weaken, the overall outlook for economic growth will diminish."

That, Wal-Mart executives said, is precisely what has begun to happen in its 4,000 U.S. stores over the past three months - even after the chain cut prices on 16,000 products this summer.

"Many customers are running out of money at the end of the month," said H. Lee Scott Jr., the chief executive of Wal-Mart.

Home Depot's chief executive, Frank Blake, described a "tough selling environment" and warned that the housing and home improvement markets would remain weak into 2008.

But Wal-Mart also blamed itself, for poor clothing and home decor products. And Home Depot has alienated customers with lackluster service, making it difficult to discern how much of the slowdown was self-inflicted damage and how much was tied to larger economic forces.

For the second quarter, which ended Aug. 3, Wal-Mart missed its profit estimate and those of Wall Street analysts, a rarity for the company, whose performance is generally the envy of the industry. Earnings from continuing operations were 72 cents a share, below the company forecast of at least 75 cents. Even so, sales rose 8.8 percent, to $92 billion.

Net income rose 49 percent, to $3.1 billion, or 76 cents a share. But that figure included 4 cents a share in one-time gains like lower workers' compensation claims.

For the year, Wal-Mart predicted it would earn $3.05 to $3.13 a share from continuing operations, lower than its original forecast of $3.15 to $3.23.

At Home Depot, fiscal second-quarter income fell 14.8 percent, to $1.6 billion, or 81 cents a share, compared with the quarter last year. Sales fell 1.8 percent, to $22.2 billion, while sales at stores open at least a year, a key measure in retailing, fell 5.2 percent.

"The housing market remains difficult, and our performance reflects that," said Blake, the chief executive. He noted, for example, that housing starts so far this year were down 22 percent, compared with a year ago, and existing-home sales were down 12 percent.

Home Depot predicted its earnings for the year would fall 15 to 18 percent, confirming an earlier forecast. Nevertheless, the company will invest in its stores, giving employees bonuses and remodeling aging outlets to better compete with Lowe's, its biggest rival.

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