Home Depot for the Long Run

Includes: HD, LOW
by: Brian Polino

The Home Depot (NYSE:HD) is the world’s largest home improvement retailer based on net sales for the fiscal year ended January 31, 2010. Their stores sell a wide assortment of building materials, home improvement and lawn and garden products, and provide a number of services. With 2,244 locations, mostly in North America, The Home Depot has a current dividend yield and P/E of approximately 3.32% and 17, respectively, which may represent a unique and undervalued investment opportunity as the company is trading based on recession earnings. Depending on how fast the housing market rebounds, The Home Depot may be both a wonderful short-term and long-term investment.

Furthermore, The Home Depot appears to be capitalizing on the hard lessons learned during the recession and preparing for a better future through the development of strong business fundamentals. For instance, they engaged in a supply chain transformation and massive inventory reduction. At the end of January 2010, The Home Depot operated twelve Rapid Deployment Centers, which now serve approximately 1,250, or 65%, of their U.S. stores and with a goal of serving 100% of U.S. stores by the end of 2010. Through the combined efforts of merchandising, finance, and the new Rapid Deployment Centers, The Home Depot reduced inventory by almost half a billion dollars in 2009, while at the same time improving their in-stock position.

During the year, The Home Depot also retired $1.75B of senior notes and re-entered the share repurchase market, repurchasing approximately $200 million of outstanding shares. In addition, on February 23, 2010, their Board of Directors approved a 5% increase in the dividend, the first increase since 2006. Chairman and CEO, Frank Blake further highlights his mission for the company,

Our strategy remains simple and straightforward: We are passionate about customer service. We are – and must continue to be – the number one authority on products in the home improvement market. And we will drive shareholder return through disciplined capital allocation.

However, The Home Depot was not without its struggles for the past few years. On January 2, 2007, former CEO Robert Nardelli resigned amid complaints over his careless management and whether his pay package of $123.7 million, excluding stock option grants, over the past five years was excessive considering the stock’s poor performance versus its competitor, Lowe’s (NYSE:LOW). His successor and new CEO is Frank Blake, who previously served as The Home Depot Vice-Chairman and Executive Vice-President. Accordingly, Blake agreed to a much more conservative compensation package than Nardelli that seems heavily dependent upon the success of the company. Another struggle was The Home Depot owned EXPO Design Center, a chain of higher-end home decorating and appliance stores, but they rapidly closed the chain with little long-term damage in 2009.

Despite the fact that the company carries more debt than the average consumer retail company, The Home Depot has paid down a substantial portion and has the cash generating ability to expand once the economy recovers and expands. The company maintains a BBB+ Standard and Poor’s long-term debt rating, which signals that the company is investment grade and positioned for long-term success.

Disclosure: The author has no positions in LOW or HD at the time of writing.