Home Depot earnings jump 17% amid recovery

Housing market boost pays off, but J.C. Penney still struggles

New York TimesAugust 20, 2013 

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A worker helps a customer in the garden center at a Home Depot in Chicago in February 2011. Home Depot’s reporting of $1.8 billion in sales surpassed analyst estimates and its own projections.

2011 GETTY FILE PHOTO — 2011 GETTY FILE PHOTO

Evidence of the housing recovery grew a bit stronger Tuesday, as Home Depot blew past analyst estimates and its internal projections, increased its yearly earnings forecast and said it “had one of the best quarters in our recent history.”

The chief financial officer, Carol Tom, said the company projected that “we are in the early stages of housing recovery” as Home Depot reported a 17 percent increase in earnings, to $1.8 billion. Sales in the second quarter grew 9.5 percent, to $22.5 billion.

Yet not all retailers saw lively home departments. J.C. Penney, which also reported earnings Tuesday, said revenue had dropped almost 12 percent for the quarter, in part because of lackluster sales in its recently revamped home departments. Its loss came in at $2.66 a share, far worse than analyst estimates for a $1.22 loss a share.

The home departments at Penney are left over from Ron Johnson, the former chief executive who was forced out in April. Penney went ahead with his plans for upscale home boutiques, unveiling them in June, but said Tuesday that they had performed quite badly. Costly items like a $2,895 Jonathan Adler sofa and $72 Michael Graves wine decanters failed to provide a draw to the specially designed areas.

“The merchandising strategy was not resonating well with our core customer, and performance has been weaker than we had hoped,” Myron E. Ullman III, the chief executive, told investors Tuesday.

Sales at stores open at least a year, a key performance indicator, slid 11.9 percent in the quarter; Ullman said they would have declined only 9.5 percent were it not for the home stores.

“We expected home to improve, obviously, when the new store shops had opened and quite the opposite happened,” he said. “We actually have less productivity in the new home stores than we do in the stores that didn’t get a home store.”

At Home Depot, meanwhile, every department posted positive comparable sales in the quarter, from gardening to maintenance to decor to kitchens.

Both professionals – Home Depot’s term for contractors – and consumers seemed to increase spending at the same rate, Tom said.

“With home prices up, people are starting to view their homes as more of an investment and not an expense,” she said.

Investors likely are factors

Some economists have suggested that only middle- and higher-income consumers, and investors buying properties, are experiencing the lift in the housing market, and Tom said that Home Depot’s customers tended to be wealthier by dint of the fact that they are homeowners.

She noted that investors, too, were probably spending at Home Depot.

“If you’re an investor group, be it a private-equity firm or someone coming in from outside the United States, you’re not buying that property to sit on it, you’re buying that property to rent it – and you can’t rent it if it’s not in good shape,” she said.

To that point, Home Depot’s installation business grew in the double digits in the quarter, she said; while that was not all investors, “the blanket comment that these investor groups wouldn’t spend money at Home Depot isn’t true.”

She said that one indicator – the number of items bought per visit – also increased, which suggested confidence.

“Items in a basket suggest a couple of things: one, that you’re not just living hand to mouth if you’re a pro, because we saw pros coming in and getting exactly what they need” in quarters past, she said. “For consumers, it means a bigger project, so I’m not just going to paint my room, but I’m going to paint my room and refloor my room.”

Penney turns the page

As for Penney executives, they vowed that they were moving on from the Ron Johnson era.

“We know where the problems are,” Ullman said. “There are no quick fixes to correct the errors of the past.”

While he said there were promising signs in back-to-school sales, Penney’s traffic was down 5.5 percent compared with the same quarter a year ago, which suggests that Ullman’s early efforts in the past few months at restoring private labels and promotions are still not attracting customers.

The company has been leaning heavily on promotions. It increased circular counts by 150 percent in the first six weeks of the back-to-school period (defined as June 30 through Aug. 10) this year versus last year, and increased the number of products promoted via email by about the same amount, according to the advertising-analysis firm Market Track.

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