May 18, 2010 / 12:10 PM / 7 years ago

UPDATE 5-Home Depot ups outlook, investors question momentum

* Q1 adjusted EPS 45 cents vs Street view 40 cents

* Raises fiscal-year profit, sales forecast

* Investors question strength of 2010 sales trends

* Home Depot shares down 2.2 pct, Lowe’s down 2.1 pct (Adds CFO comment, updates share activity)

By Dhanya Skariachan

NEW YORK, May 18 (Reuters) - Home Depot Inc (HD.N) boosted its forecast for the year after spring sales beat Wall Street expectations, but investors questioned how strong home improvement sales trends would be in the rest of 2010.

The news from the top U.S. home-improvement chain came a day after rival Lowe’s Cos (LOW.N) gave a disappointing profit forecast for the remainder of the year [ID:nN17148997].

Home Depot and Lowe’s said 2010 is a transitional period for their industry. Significant growth might not come until 2011, Lowe’s CEO Robert Niblock said on Monday.

Home Depot shares were down 2.2 percent at $34.81. Lowe’s shares were down 2.1 percent at $24.74 in afternoon trading on the New York Stock Exchange.

“It is like choosing (between) a blue gumball and an orange gumball. They both taste really the same,” Barclays analyst Michael Lasser said of the difficulty in setting a preference for one of the companies in the current market.

A report on Tuesday showed U.S. housing starts touching a 1-1/2 year high in April, but a drop in permits to a six-month low suggested the housing market recovery will remain slow. [ID:nN18135902]

“We are not anywhere near back to kind of peak spending or the type of buying habits we saw in 2005, 2006,” said Edward Jones analyst Robin Diedrich.

In its first quarter, Home Depot’s net income rose to $725 million, or 43 cents a share, from $514 million, or 30 cents a share, a year earlier.

Excluding items, the profit was 45 cents a share, beating the average analyst forecast of 40 cents.

Sales rose 4.3 percent to $16.86 billion, exceeding Wall Street expectations of $16.37 billion. Same-store sales for the first quarter were up 4.8 percent, with sales at its U.S. stores open for at least a year up 3.3 percent.

Home Depot raised its forecast for net earnings from continuing operations to $1.88 a share from $1.79. Analysts were expecting $1.87.

For the fiscal year, Home Depot expects sales to increase about 3.5 percent, up from a prior view of a 2.5 percent rise.

“The sales outlook appears to us as only reflecting the first-quarter performance,” suggesting the outlook for the rest of the year was unchanged, UBS analyst William Truelove said.

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For a graphic on Home Depot’s results, click on:

link.reuters.com/veh84k

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NO CLEAR RECOVERY FOR BIG-TICKET SPENDING

Both chains had strong springtime sales as people spruced up lawns and gardens and took advantage of a federal stimulus for energy-efficient appliances, but the average sales receipt at both companies was still down.

Home Depot has yet to see a clear recovery in its professional business segment or big-ticket discretionary home projects such as special-order kitchens.

“It’s going to take some time for people to spend a lot of money in that category, we believe, because they look at things like, ‘Is my house an investment or is my house an expense?,'” Home Depot Chief Financial Officer Carol Tome told Reuters.

Home Depot’s forecast was much better than Lowe‘s, Sanford C. Bernstein analyst Colin McGranahan said. Lowe’s had given a lackluster second-quarter outlook and the mid-point of its full-year forecast was below his expectations.

McGranahan has a “market perform” rating on both Home Depot and Lowe’s and said the two companies’ shares were already pricing in the recovery. (Reporting by Dhanya Skariachan; Editing by Dave Zimmerman, Maureen Bavdek and Robert MacMillan)

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