How Can Home Depot Drop Prices 40%?

There are several reasons retailers drop prices over the holidays. One is to bring in shoppers and hope they will buy products which are not deeply discounted. Another is to fight for market share, even it the battle triggers losses. Another is to liquidate inventory. No matter which of these is the case, it is unimaginable that Home Depot (NYSE: HD) can make money on items the prices of which it has dropped 40% or even 30%.

To begin, Home Depot claims it has cut prices on “30,000” items. That seems to be more than all the items it can sell.

One of Home Depot’s most aggressive offers is a 45% discount on Samsung French Door refrigerators. This brings the price down to $998. Home Depot has to pay Samsung nearly that much, or perhaps more for the product. Home Depot has several Samsung refrigerators it sell for 40% below the normal retail price. To top off the Home Depot offer, it includes free home delivery.

Another example of Home Depot’s generosity is price cuts of 30% on washers and dryers.

Home Depot’s individual price cuts are not important in and off themselves. What experts in retailer tactics follow is the chance that Home Depot’s profits for the holidays could be razor thin, in turn, raises the issue of whether Home Depot will wreck its earning in the fourth quarter.

Investors have favored Home Depot shares since its last earnings release, because many believe the retailer has accelerated its growth from the trouble recession period, in which the housing industry was in collapse. Home Depot shares traded at $97 recently, barely $2 below their 52-week high. The sector itself is in favor on Wall St. The stock of smaller home supply company Lowe’s recently traded at $63, barely $1 below its 52-week high.

Sometime in February or March of next year, Home Depot will release earnings for the current quarter. Almost no one will know until then whether the company wrecked its profits by dropping prices too low. If Home Depot has, its shareholders will pay the price.