Home centers hit with grim financial reality

ATLANTA —As recently as last fall, home improvement retailers mired in a slump were optimistic the housing crunch would ease this summer and lead to a turnaround in the second half of 2008. But now, both Lowe’s and The Home Depot acknowledge that recovery is a long way off.

Instead of looking for a light at the end of the tunnel this year, both retailers are projecting that sales in 2008 are going to be worse than last year. And 2007 was no picnic.

Home Depot reported its first ever decline in year-to-year sales in 2007, with revenue declining 2.1% to $77.35 billion. The fourth quarter, ended Feb. 3, was especially bad, with same-store sales falling 8.3% and earnings of $671 million, compared to $925 million in the same quarter last year. Home Depot ceo Frank Blake also acknowledged the chain “lost share to the market,” during the quarter and the full year.

Home Depot has forecasted a sales decline this year of 4% to 5% with same-store sales dropping in the mid to high single digits. To ride out the storm, Home Depot plans to open only 55 new stores—compared to more than 100 in 2007—and limit capital spending while it waits for the housing market and the economy to rebound.

Over at Lowe’s, the picture is slightly brighter, but still bleak. The chain is forecasting same-store sales to fall 5% to 6% this year with total revenues expected to rise only 3%. And the sales increase will come from the addition of 120 stores scheduled to open during the year, growing its store base by 8%.

Those planned openings—more than double that of its larger rival—should allow it to take market share away from Home Depot once again.

Lowe’s ceo Robert Niblock noted that it “captured market share in the [fourth] quarter and the year.” Lowe’s reported fourth-quarter earnings of $408 million, down from $613 million in the fourth quarter of 2006, and $10.4 billion in revenue.

With limited prospects for the near future, Home Depot and Lowe’s are likely to pursue lower-hanging fruit this year with promotions targeting small projects like painting and general maintenance.

NPD Group analyst Mark Delaney said he sensed some “cautious optimism” among retailers at a recent builder’s show, but said there was little talk of a significant improvement in sales this year. He said most retailers are bracing to ride out the slump by promoting basic products instead of high-ticket items and working on improving operations at store level.

“One of the offshoots of a bad economy is that it forces retailers to take a closer look at the inside of their stores,” said Delaney. “So you should be seeing better customer service, better product presentation and more creative promotions this year.”