Home Depot Is Poised For A Turnaround

The Home Depot (HD), the top home-improvement retailer in the US, Mexico and Canada, has suffered two big blows. First, the residential real estate market has taken a hit and the do-it-yourself upgrading of homes has slowed to a snail's pace. Second, the infamously bad customer service influenced an exodus from The Home Depot in lieu of its more competent competition.

But now the turnaround is beginning. The biggest reason for this is HD's new chairman and CEO, Frank Blake, who took the helm this year after poor performance and outrageous compensation package concerns, led to the resignation of former CEO Robert Nardelli.

Nardelli's strategy had been to grow The Home Depot by buying wholesale distributors, and to offset acquisition costs by cutting essentials -- like staff! If you've been into a Home Depot over the last several years, you might have found yourself wandering the huge aisles looking for someone -- anyone -- to help you pick out nails or paint. I know it frustrated me, for one. And it hurt The Home Depot as a whole, allowing the more people-friendly Lowe's Companies, Inc. (LOW) to step in as a serious competitor. I wrote about my own experiences many months back in my blog.

But one of the few positive achievements that Nardelli accomplished during his time at HD was bringing Blake on board in 2002. Before that, Blake was at General Electric Company (GE) as well as holding the post of deputy secretary at the Department of Energy. His salary pales in comparison to Nardelli's shocking overcompensation, and unlike Nardelli, Blake's bonuses are pinned to meeting certain financial mileposts. This is a smart move on HD's part, and I like Blake's focus back on the stores -- he is restaffing them and including specialists in the staff.

The Home Depot, like most businesses connected in some way to the housing market, is affected by the slump in real estate. People are buying fewer homes and are tightening their wallets -- which often means home improvement projects are put on the back burner. Rather predictably, same store sales fell 8% in HD's first quarter 2007 results. However, The Home Depot is making some smart moves. In addition to focusing money back on the stores, it has started an installation business squarely targeting retiring baby boomers who are increasingly wanting others to do their projects for them.

Type of stock: The leader in home-improvement retail, this chain has suffered under poor management and the downturn in the housing market, but its new management is tops and when the next real estate cycle starts -- in four or five years, The Home Depot will improve.

Price target: Currently trading at $39.21, I'd feel comfortable picking up The Home Depot in a market pullback and then holding on for the longer term. Once the housing market picks back up, we could see The Home Depot swing back up to the $60's, where it was at the height of the real estate boom.

HD 1-yr chart:

Comments

[Quaker:]

I think HD will be a good buy when it reaches $10 a share. It's one thing to say they're going to hire better people. It's another to hire them. Currently, they'll take anybody with a heartbeat and passable language skills. This isn't going to change because smart, building savvy people aren't going to work for a company with low pay, rediculous hours and no winter hours.

As to installations, no reputable contractor would go within a mile of HD. Their cabinets are overpriced crap.

I can't think of a single thing HD is good at. They're not competitive on price, their stores aren't designed to sell large quantities of lumber or building materials, inventory is a mess, (they rarely sell all the parts necessary to complete a job and they're too stupid to realize this), Their rental business doesn't work, they're delivery policy is absolutely and totally incomprehensible and their store design is the worse in the business.

They fill their isles with anything they can get cheap. Big screen TV's, Soda, paper towels, space heaters.... Their reputation is going to take more than another idiot with a MBA to fix.

2007 Jun 05 09:41 AM

[Wayne Crumpley:]

I agree totally !! Last Friday I went to Home Depot in Las Vegas to purchase a barbeque. There were very very few employees present. I could have stolen the item far easier than it was to purchase. However, I was determined, so I did go through the process of finding a kid, forcing him to help me, and find someone to take my money. This was not easy, and very time consuming. My wife said that I had a lot more patience than she, and she would have walked out . . . . (the rest is unprintable). Needless to say, Home Depot is high on my list for a short, or a put option. I'll be following the stock DOWN.

2007 Jun 05 03:35 PM

[Quaker:]

Haha... I'm guessing the CEO gave this "analyst" 30 seconds of his time and now she's pie eyed over him.

I was in HD once and they had two stacks of R-19 insulation next to each other, each made by the same company. I asked the guy what's the difference. He shrugged and said, Hell if I know. One other time, the guys in truck rental told me they weren't going to charge me for the 1 1/2 hours they used to load the truck.

2007 Jun 06 12:01 PM

[User 499470:]

home depot self check out lines. come on people that's why is called self check out, if you don't know HOW TO USE IT DON'T.

Oct 13 12:14 PM