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Tickers in this Article: HD
With demand for housing on the skids, it's hardly a secret that home-improvement stores are struggling. Home Depot's (NYSE: HD) recent first-quarter-earnings miss shows just how bad things are.

In case you missed it on Tuesday morning, May 15, the company reported Q1 earnings of 53 cents per share and revenue of $21.6 billion. Wall Street expected 59-cent-per-share earnings and revenue of roughly $21.8 billion.

Home Depot's chief exec, Frank Blake, summed the quarter up by saying, "The housing market continues to be a challenge, and erratic weather conditions across the United States negatively affected our spring selling season."

Also a telling sign, the company's same store sales for the period were down a whopping 7.6%. This drop is simply huge, and it's a clear sign of just how dire things are.

There are other metrics that are worrisome as well. For example, in the quarter the company had 1.2% fewer customer transactions and the average sales receipt was down about 2.9% from the comparable period a year ago.

Turning It Around
There are some simple cost savings and some revenue opportunities to be had. However, other than these, Home Depot will have to ride-out the storm, and reinvest in the business, so that when things do turn around, its ready to pounce.

To its credit, the company will be overhauling some of its locations, and is said to be considering the sale of its supply unit which provides construction materials to contractors.

As well, I think it is increasingly possible that a white knight (in the form of a private equity firm) might emerge and make a bid for the company. Becasue, at roughly 14-times earnings and at about 0.9-times sales, the stock oozes cheapness.

Circling Vultures

If the stock price continues to drift sideways or south, I think that management will be under increasing pressure to find ways to enhance shareholder value. And among the options that management will almost surely be forced to ponder, at least at some point, is an outright sale.

With just over $2 billion in cash and equivalents (at the end of April) and just under $27 billion in property and equipment on its balance sheet (more than $14 a share altogether), the scavengers are begining to circle this wounded behemoth.

Future Earnings
Early on in the year, management indicated that earnings per share would decline between 4% and 9% this year. In congruence with the earnings report, management indicated that it now expects the declines will be closer to the 9% range.

At present, Wall Street is expecting the company to earn $2.68 per share this year, and $2.99 per share next year. But frankly, based upon management's updated guidance (and the first-quarter results), I think that the current consensus estimate might have to come down at least five cents per share and possibly as much as 8 cents per share.

Regarding the $2.99 a share estimate, I think it's wishful thinking. I can't see how anyone could forecast that type of earnings growth at this point, given the near-term uncertainty for the housing market.

The Bottom Line
While I like Home Depot, I would prefer to wait for a more opportune time before buying the stock. Look for signs that the overall housing market is on the mend before revisiting the idea.

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