Home Depot Stalls Despite Strong Growth in its Supply Unit

Home Depot (HD) announced surprising financial results yesterday. Total sales are up 11.3% but net earnings are essentially flat. B school students are failed when they come up with this kind of model. Total retail sales grew 1.1% but same store sales dropped 5.1%. Total sales in HD Supply grew 159%.

Included in the press release was Bob Nardelli, chairman, president & CEO, saying "Our sales performance was softer than we anticipated." Essentially the CEO made a series of stay the course comments.

What is positively of interest is the phrase that they will be moving to a richer store staffing model. Duh! How much money has walked out of the store because you could not get service? Now they say they see the light.

Home Depot is a big entity depending on a lot of very small but unique decisions. When a customer has a question about a plumbing fixture, the question is incredibly important and usually wrought with anxiety. To Home Depot it's maybe around $5 of revenue. This is what Mr. Nardelli does not comprehend.

The shift to HD Supply represents big picture thinking. We like clients who need truck-loads of stuff. The individual home-owner "do it yourselfer" is a second class citizen. Yet, HD Supply with its huge growth does not seem to be driving the bottom line up.

If the retail consumer is not enticed back, put this stock on the dead money list. Housing cycle excuses aside (don't people renovate instead of moving?).

Look for some executive staffing changes before the next annual meeting. If the retail investor does not return, Mr. Nardelli must go.

HD 1-yr chart: