Home Depot Builds Caution

On a conference call with analysts, Home Depot Chief Financial Officer Carol Tome said comps started off strong in May before softening in June and turning negative in July. Customer visits also declined for the ninth consecutive quarter, falling 4.2%, and the company blamed smaller transactions on economic conditions.

The company's CEO, Robert Nardelli, said that while the housing market is indeed slowing, repairs and maintenance would keep homeowners returning to Home Depot stores.

"We believe discretionary dollars will become repair and maintenance dollars," said Nardelli. "On the other hand, the consumer is feeling the pressure of higher oil and gas prices, rising interest rates and adjustable-rate mortgage resets, and this pressure on the consumer impacts our transaction count. Therefore, we see a challenging second half, and we are planning conservatively overall, but not in the retail business."

For the full year, Home Depot said it expects to hit the bottom end of its January guidance calling for 10% to 14% EPS growth on 14% to 17% sales growth.

Nardelli also said Home Depot will ramp up capital expenditures on its stores and labor force in an effort to steal market share in a "down market."

"The biggest takeaway from the release is the decision to re-invest in retail, tacitly acknowledging eroding service standards and the need to defend market share," said Goldman Sachs' Fassler. "This marks a sharp change in priorities from making/beating guidance to more qualitative metrics. We believe this is clearly the right long-term step."