Housing Slump Drags Home Depot

In addition to a 3.5% slide in total sales to $19 billion in the quarter, the company registered negative comparable store sales of 6.2%. "We are facing a tough environment as housing indicators continue to deteriorate," Home Depot chairman Frank Blake said in the conference call. He added, "We expect the soft market will continue."

Blake cited "the current overhang in the housing inventory and the difficulties in the subprime mortgage industry" as major factors affecting the company's sales and earnings. He also pointed to survey figures that the company uses to estimate which way it thinks the market is heading. The survey the company uses is the ratio of residential construction spending to GDP.

The 60-year average of construction spending to GDP is 4.8%, and at the height of the market in 2005 the ratio had climbed to 6.25%, Blake pointed out, but the market has now corrected to 4.5%. "When you consider that GDP is approximately $14 trillion, this correction represents a market contraction of more than $240 billion," Blake said.

Nonetheless, Blake said Home Depot can see a silver lining in the housing market clouds. "As painful as the correction has been and will probably continue to be," he said, "the value of the time-tested average of residential spending to GDP is that it gives you confidence in the market potential ahead."

All things considered, Home Depot expects that its earnings per share will decline by as much as 11% from last year. At the end of the third quarter, the company operated a total of 2,224 retail stores and employed 350,000 workers.