Home Depot Builds Towards Profits - Barron's

CEO Frank Blake is trying to solve Home Depot's (HD) problems and, thus far, the turnaround seems headed in the right direction. Barron's Neil A. Martin takes a closer look at the company.

Blake has focused on energizing store staff, and is working to get back to Home Depot's core mission of selling home-improvement items to consumers. In the process, the company has closed unprofitable businesses like Home Expo design stores, and sold HD Supply, a more successful wholesale-distribution business.

Shares are down 40% since Blake began as chief in January 2007, but underperformance could change in the next year or two as Home Depot recovers along with the economy. In the meantime, the stock offers a 3.9% dividend yield.

Blake has dramatically slowed down expansion; the company expects to add only 12 new stores this year to its 2,200 store network. Blake is also trying to improve the customers' buying experience, spending $2.4B in 2007-2008 to make stores more customer-friendly with nearly another $1B planned for this year. "The economic downturn gave us the time and circumstances to make needed changes," Blake explained. "We needed to get back to basics."

Home Depot has revamped its supply chain with new distribution centers that are more modern, cost-efficient and automated than the previous traditional warehouse-distribution complexes.

Management reaffirmed its FY '09 estimate of a 9% sales decline with negative same-store sales in the high-single-digit area and EPS from continuing operations off 7%. Consumer spending is starting to improve incrementally, but big ticket items remain weak. However, even big ticket spending should pick up eventually, and that's a key part of the bull case for the stock. Despite the downturn, Home Depot has continued to gain market share.

Analysts expect FY '09 EPS of $1.40, and earnings per share could reach $1.55 in FY '10 as margins continue to grow.

• Deborah Weinswig, of Citigroup Global Markets, believes "Home Depot is going to be the stock to own going into its current fiscal year, and we would be buyers at current levels." She has a Buy rating on the stock with a $32 price target.

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• During Home Depot's critical spring fix-up season, customers were focused on small purchases, with amount spent per transaction down 8.2%, while transactions declined a milder 1.3%. "Our markets, and the consumer in general, remain under pressure," CEO Frank Blake said.
• Home Depot: Q1 EPS of $0.35 beats by $0.06. Revenue of $16.18B (-9.7%) vs. $15.86B. Affirms full-year guidance. (PR)
• Home-improvement sales are headed for a 6.4% drop in 2009 - the biggest in 32 years. In March, Home Improvement Research Institute, whose members include Home Depot (HD), Lowe's (LOW) and Black & Decker (BDK), called the federal stimulus package "too small and too slow."

Comments

[JohnJackson:]

It is interesting to note the difference between Home Depot and Lowes. HD is wisely cutting back, while the cowboys at Lowes keep racking up more debt to open new stores into a housing crash! In 4-5 years, after things pan out, HD will have the entire market to itself, and Lowes, perhaps, will be out of business. That means big profits for Home Depot. I'll buy HD stock, but there is no rush, because I think that stock prices are now irrationally high, and will come down.

Jun 12 03:24 AM