Home Depot Versus Wal-Mart: Two Reads on the Economy (HD, WMT, LOW, COST, TGT)

The Home Depot, Inc. (NYSE: HD) and Wal-Mart Stores Inc. (NYSE: WMT) both reported earnings this morning.  Both also gave two very different reads on the economy and the implications may be in place for the rest of 2011.  These two earnings are showing some key insight for Lowe’s Companies Inc. (NYSE: LOW), Costco Wholesale Corporation (NASDAQ: COST), and Target Corporation (NYSE: TGT).

Home Depot gave earnings of $587 million or $0.36 EPS versus $342 million or $0.20 EPS from a year earlier.  Sales were up almost 4% to $15.13 billion.  Estimates from Thomson Reuters were $0.31 EPS and $14.8 billion.  Home Depot’s board also raised its quarterly dividend by 6% to $0.25 cents per quarter.  The home improvement retailer now sees 2011 to generate $2.20 EPS with sales projected at 2.5% growth based on low-single-digit same store sales growth.  Fourth-quarter comparable store sales rose 3.9% but 4.8% in the U.S.

The picture at Wal-Mart Stores Inc. (NYSE: WMT) is much different.  Profit rose 27% due to international gains to $6.06 billion, or $1.70 EPS.  Outside of items, the earnings would have been $1.34 EPS.  Sales in the January-end quarter rose 2.5% to $115.6 billion, but its membership and other related income fell 4.5% to $760 million.  Thomson Reuters was at $1.31 EPS and $117.5 billion in sales.

Wal-Mart’s forecast for the coming first quarter was $0.91 to $0.96 with its full-year expected to bring earnings of $4.35 to $4.50 after lowering its Cap-Ex spending by an expected $1 billion to $13.5 billion.  Thomson Reuters had estimates of $0.96 EPS and $4.44 EPS.

Here is where things are showing a difference.  Wal-Mart is proving itself to be the Trade-Down play, Home Depot is finally seeing some stabilization and some rekindling of demand.  That is not as much the case at Wal-Mart as inventories are rising.  By no means does the Home Depot data indicate a great housing market is afoot, but the home improvement retailer has also so far gone without the benefit of any significant natural disasters that can act as an added boost.

The market is so far judging these as a tale of two retailers.  It may be more like a tale of two economies.  Wal-Mart shares are down 3.1% at $53.67 and Home Depot shares hit a new 52-week high of $39.38 before its shares recently went into the red by 0.2% to $38.40.

Lowe’s Companies Inc. (NYSE: LOW) reports earnings on Wednesday morning and its shares are up 0.1% at $26.34.  We have Costco Wholesale Corporation (NASDAQ: COST) reporting earnings next week, and the theory would imply that if the higher-end and growth markets are doing better then Costco is picking up slack from Wal-Mart.  Ditto for Target Corporation (NYSE: TGT), which reports earnings in just two days.

JON C. OGG