Home Depot, Wal-Mart Earnings Fuel Gains

Home Depot Inc. (NYSE: HD) and Wal-Mart Stores Inc. (NYSE: WMT), two components of the Dow Jones industrials, reported better than expected earnings today but not enough better to overcome questions about the second half of 2010.

Home Depot earnings were $1.19 billion for EPS of $0.72, up 6.8% over the same period a year ago, and above EPS estimates of $0.71. Home Depot revenue rose from $19.07 billion in the second quarter of 2009 to $19.41 billion, still short of analysts’ estimates of $19.59 billion. Walmart earnings were $3.59 billion, EPS of $0.97, up 3.6% from profits of $3.47 billion a year ago. Walmart revenue rose 3% in the period, to $103.7 billion. Analysts had been expecting EPS of $0.96 on revenue of $105.3 billion.

Both retailers also raised full-year guidance. Home Depot now expects EPS for the full year of $1.90, up from $1.88 previously. Walmart raised its EPS guidance from $3.90-$4.00 to $3.95-$4.05. Cautious optimism, at best.

Home Depot said US same-store sales rose 1% compared with the same period a year ago, while WMT reported US same-store sales down -1.8%. HD stock leaders noted that expected annual sales growth has been forecast at 2.6%, less than the 3.5% the store was predicting in May.

Walmart provided a revenue guideline for the third quarter for its US WMT stores of down 2% to up 1%, compared with a drop of 0.5% in the third quarter of 2009. Sam’s Club store revenue is guided third quarter sales flat to up 2%, excluding fuel sales, compared with an increase of 0.1% in the third quarter of 2009.

WMT revenue growth is coming primarily from its international sales, which were up 11% year-over-year. The company replaced its US CEO during the quarter and accepted the resignations of two other senior executives in merchandising and apparel. The company is trying to figure out a way to juice up its apparel sales, most recently by focusing more on basic clothing and giving up on the trendier stuff.

Even though both Home Depot and Wal-Mart Stores Inc. beat earnings estimates, the failure to meet revenue estimates and the lukewarm forecast for full-year earnings growth point to continuing pressure for the rest of the year. Consumer confidence is falling, and shoppers are very cautious about spending, preferring instead to pay down credit card debt rather than run-up new debt.

The root of the problem is uncertainty about home prices and values. Consumers are accommodating to the change from using their houses as cash machines, and have not yet found a substitute. Wages are not rising, credit is tight, and less spending is now the rule. Until the jobs market improves, even workers with jobs won’t feel comfortable spending, fearing that they could be next in the unemployment line.

Home Depot stock is up about +4.5% so far today, and WMT stock is up more than +2%. The reasoning must be that a lack of bad news is, in fact, good news.

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