The First Big Retail Stock to Suffer from Slow Housing

Home Depot came out with its earnings the other day and the message wasn’t good. All of the sudden Home Depot reports a poor financial quarter and forecasts soft results going forward.

Was Home Depot’s financial performance an “all of the sudden” event or was the writing on the wall?

On September 30 my lead PROFIT CONFIDENTIAL article was “Dumping the Retail Stocks.” In that article I wrote about how the softness in the housing market would eventually catch up with consumer spending at the retail level. Home Depot is a perfect example of that prediction coming to fruition.

For the third quarter, Home Depot missed analyst consensus predicted earnings per share. The company also reported that sales at stores open more than one year are down 5.1% from a year earlier. Home Depot is now predicting current year earnings will be up only 5% from last year–well below its previous expectation of earnings growth in 2007 in excess of 10%.

Home Depot CEO Robert Nardelli made it clear: The fast slowdown in the housing market came sharper than Home Depot had expected. Nardelli expects the housing market to continue under pressure through 2007. (No kidding. Maybe we should start sending him PROFIT CONFIDENTIAL!)

If you own any retail stocks in your portfolio… even those not related to housing that are not luxury goods makers… you need to seriously look at how those stocks will fare under weaker consumer spending patterns. I’m particularly cautious of big box retail stocks and I don’t think this holiday season will be as good for retailers as it was the past couple of years.

Again, the soft and weakening U.S. housing market will have a greater negative effect on the economy than most analysts presently comprehend. Be prepared.

[Yesterday, stocks rallied on new the U.S. Producer Price Index fell at a record pace. The thinking was the Fed would lower rates earlier rather than later to stimulate the economy. Housing and construction stocks were the biggest gainers on the market. Don’t let the bear fool you! The sharpest drop in the Producer Price Index on record is nothing for the stock market to cheer about–it smells like deflation and that’s something low rates won’t fix quickly. Deflation is also terrible news for the housing market.]