Home Depot: Quaint Fixer-Upper or Ugly Money Pit?

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Includes: HD, LOW
by: YCharts

Sure, the economy stinks, and there are still too many houses for sale on your street, but you’ve noticed all summer long that your industrious neighbors are busy building new decks, painting inside and out, and hanging fancy new porch lights.

The return of the Do-It-Yourself’er.

This coincides with progress on a larger fixer-upper, namely Home Depot (NYSE:HD). After a sickening four-year slide in same-store sales (-2.8% in 2006; -6.7% in 2007; -8.7% in 2008; -6.6% in 2009), the DIY giant eked out same-store gains of 4.8% and 1.7% in the first and second quarters of this year, respectively.

Must be where the neighbors have been buying all that stuff, eh? Here’s a look at revenue growth at Home Depot and its main competitor, Lowe’s (NYSE:LOW).


And in the backroom at Home Depot, changes are afoot, too. Bob Nardelli, the vastly unpopular CEO who walked off with the famous $210 million exit package, gave way to a CEO, Frank Blake, far more focused on rebuilding Home Depot’s service and on making its stores and distribution system more efficient. While the number of stores, 2,244, is essentially unchanged over the last three years, Blake has been investing heavily in training and logistics so that Home Depot stores actually have what people want and so that sales people there can actually help customers find and use the stuff.

Sure the collapse of the housing bubble extended the turnaround time for Home Depot, goes the argument of the bulls; but the recovery of the economy and the eventual recovery of the housing market, coupled with Blake’s spit and polish, ought to bring Home Depot roaring back. Perhaps it’s looking cheap:


Before loading up the cart with Home Depot shares, however, it’s worth examining just how deep a decline Nardelli and Blake have presided over. Home Depot’s business, after all, is selling goods from stores that average about 105,000 square feet of enclosed space. How’s that been going? Not so well, and for a long time, it turns out. Sales per square foot have been in a near-continuous, 10-year decline, starting out at $415 in 2000 and hitting $279 last year. And average-weekly-sales per store also have been in freefall during the past decade: $864,000 in 2000, sliding to $563,000 by last year. That’s a 35% decline. Sure doesn’t seem like a company getting better at what it does.

How did that happen? Many blame Nardelli for gutting the sales culture. But the company also blanketed markets with stores, cannibalizing sales at existing outlets. (The guy writing this in Chicago is a 5-minute drive from two separate Home Depots.)

The hangover from the Nardelli years might not be entirely over, either. In unloading HP Supply, a supplier to contractors that Nardelli had built up, Home Depot invested $325 million for a 12.5% stake, which it then entirely wrote off over 2008-2009. But it also guaranteed a $1 billion loan as part of the deal, and the guarantee has been extended from its original expiration date of August 12, 2012 to April 1, 2014, increasingly Home Depot’s exposure to the venture.

Nardelli also largely oversaw stock buybacks that look mighty pricey now. Home Depot since 2002 bought back 753.6 million shares for $27.5 billion, or about $36.50 a share. At today’s stock price: Ouch.


What’s more, Lowe’s, which operates the brighter, airier stores of the two chains, has barely let up in its expansion, even as Home Depot hunkered down. Lowe’s opened 153 stores in 2007; 115 in 2008; 62 in 2009; and expects to open 40-to-45 this year. At 1,724 stores currently, Lowe’s is closing in on Home Depot, at 2,244. That’s a great deal for your neighbors and you, if you take on a DIY project. But perhaps it’s a glut if you’re trying to run one of these companies.

Disclosure: No Positions