Housing Woes Weigh on Home Depot

Home Depot (HD Quote) continues to get hammered by a very weak U.S. housing market, a fact reflected Tuesday in its first-quarter results.

At this point, investors must wait until 2009 for the turnaround story to take place at the country's largest home improvement retailer.

Nonetheless, my thesis on Home Depot, which I feature as a stock to own in the Bricks and Mortar mock portfolio, remains unchanged following today's earnings report.

Home Depot's sales fell 3.4% in the quarter to $17.9 billion. Same-store sales fell 6.5%, which was better than the 8.4% drop that Lowe's (LOW Quote) -- the second largest player in the home improvement -- reported on Monday. However, an extra week in Home Depot's quarter helped sales by $524 million, the company said on the call. Absent this week, same-store sales would have declined 9.2%

To some degree, everyone expects 2008 to be a horrible year for Home Depot. The company itself, on a conference call Tuesday, told investors it is comfortable with the low end of its guidance: for EPS from continuing operations to decline 24% from 2007. This excludes the effect of the $543 million one-time charge in the current quarter related to store closures.

Buying Home Depot today is not a bet on 2008, but one on 2009 and beyond. I continue to expect the home improvement retailer will see a turnaround in sales once the housing market begins improving in 2009. This year's earnings decline should be the trough, and once the economy eventually improves Home Depot is in a great spot to capitalize, since weaker mom and pop stores will be pushed out of business by the credit crunch.

Meanwhile, investors buying the stock today are being paid to wait with a 3% dividend yield and a 4% free cash flow yield.