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The growth story waned at

Home Depot

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in the fourth quarter as profitsshrank on a 6% decline in same-store sales.

In the fourth quarter ended Feb. 2, the world's biggest home-improvementretailer earned $686 million, or 30 cents a share, compared with $710million, or 30 cents a share, a year earlier. Sales fell 2% to $13.2billion. Analysts had been expecting earnings of 27 cents in the latestquarter.

For 2002, Home Depot earned $3.7 billion, or $1.56 a share, on salesof $58.2 billion. The company's revenue was up 8.8% over theprevious year, and excluding an extra week in its 2001 fiscal year, HomeDepot's sales increased 10.6%, said Carol Tom¿, the company's chieffinancial officer. However, that was a far cry from the company's initialrevenue growth expectation of 15% to 18% for the year.

"We are disappointed with this sales growth as it fell short of ourinitial sales growth targets," Tom¿ said.

Tom¿ blamed the disappointing sales in part on price deflation incategories such as lumber, increasing cannibalization of sales as thecompany opens new stores in existing markets and the difficulties thecompany experienced with keeping merchandise in stock as it modifies itsproduct assortment. Home Depot also chose not to repeat a promotion it ranin the fourth quarter a year ago on its flooring products, which led to adecline in sales of those products, she said.

The company's overall and same-store sales declines were mirrored inother sales statistics. The company's average ticket size decreased 1.3% inthe quarter to $47.32, Tom¿ said. Meanwhile, the average weekly sales perstore fell from $723,000 in the year ago period to $652,000 in the just-completed quarter, she said.

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While the company's sales were disappointing, it did make some headwayon increasing its gross profit margins, which represents the differencebetween what a company charges for its products and what it pays for them. Compared with the same period a year ago, Home Depot'sgross margins increased to 32% from 30.8% of sales.

Reductions in the prices it paid for goods, a decrease in lostinventory, or "shrink," and lower markdowns helped improve the company'sgross profit margin, Tom¿ said. The company expects its gross margin toimprove in 2003, she said.

Meanwhile, the company's marketing, general and administrative costsincreased in the quarter, rising from 22.3% of sales to 23.7%. Such costsrose in part due to increased store renovation expenses and surging medicalcosts, Tom¿ said. But the company also chose to invest more in payroll forits store associates and managers, she said.

"We view payroll as an investment in our stores," she said. "Continuingthis support even in a soft sales environment enables us to have a betterin-stock position and customer service."

Home Depot also said it would stop providing quarterly guidance and would onlyestimate annual results starting this year.

"This reflects our long term outlook for our business and should not beinterpreted as signaling a change in our outlook for 2003," Tom¿ said.

Home Depot expects its 2003 sales to rise between 9% and 12% andearnings to rise between 9% and 14%. Same-store sales will be flat toslightly positive, the company said.

The company has launched a new advertising program and is increasing itsstore remodeling endeavor to try to boost sales, said Bob Nardelli, thecompany's chief executive officer. Home Depot plans to spend $4 billion incapital expenditures in 2003, up from $2.7 billion in fiscal 2002, companyofficials said.

The capital expenditures include about $250 million toward its storeremodeling effort, Nardelli said. Nardelli noted that more than one-quarterof the company's stores are more than 7 years old with high annual volume.

"All of this is compounding the wear and tear," he said.

The company expects to open 200 new stores and add 40,000 employees in2003. The company plans to continue its store growth "not because it'stradition, but for the opportunity to reach additional customers and staycompetitive in existing markets," Nardelli said.