Home Depot maps out back-to-basics strategy

No. 1 home improvement firm to boost its stores, staff levels

March 01, 2007|By Cox News Service

ATLANTA -- The Home Depot Inc., known for breakneck growth during much of its history, is shelving wide-eyed projections to focus instead on a major fix-up job within its retail business.

The Atlanta home improvement giant unveiled a back-to-basics plan yesterday that braced investors for a slim year as new chief executive Francis S. Blake tries to get the Home Depot house in order.

Sales will grow 2 percent at most this year, boosted mainly by a wholesale supply business that caters to industrial customers, Home Depot said. In fiscal 2006, Home Depot's revenue grew 11 percent to $90.8 billion.

Retail sales have been in a slump this year, partly because of a depressed housing market that is not expected to pick up until late this year or early 2008. Sales at stores open at least a year fell for much of 2006, and Home Depot said they'll continue to slide this year.

Per-share earnings in 2007 are projected to drop 4 percent to 9 percent, the first such decline in more than 15 years. (Those results don't include the benefit of a 53rd week in this fiscal year.)

Yet even in a difficult year, executives said they would spend $2.2 billion to remodel Home Depot's aging stores, while stocking them with better merchandise and improving staffing levels to gain back market share lost to Lowe's and other rivals.

Blake told analysts gathered at the retailer's annual investor conference in Atlanta yesterday that his first year on the job as CEO will bring "focus, simplification and investment - and, hopefully, less noise," in an apparent reference to the criticism surrounding his predecessor, Robert L. Nardelli.

Blake, who took the helm of Home Depot in early January after Nardelli's abrupt exit, was expected to take a conservative stance. After reporting a 28 percent drop in fourth-quarter profit last week, he warned analysts that he wasn't too optimistic that Home Depot would pull out of the housing slump with big strides anytime soon.

Executives said yesterday that they're banking on this year's retail investments to pay off with "above market" growth rates beyond 2007.

Sales are expected to grow about 5 percent a year after 2007, on par with the growth of the home improvement market, the company said.

Profit will grow at least 5 percent annually, the company said. With its stock buyback program in full swing, per-share earnings should increase 10 percent a year, according to the company.

Home Depot typically outlines a five-year growth plan at its annual investor conference, using it as a forum to unveil major growth initiatives and various pilot projects that the retailer is testing. That was not the case this year, though.

The company's buying spree is over for now, Blake said, particularly in light of the uncertain fate of HD Supply, the wholesale division that was touted last year as a major growth vehicle.

Shortly after Blake became CEO, Home Depot announced it was exploring a possible sale of the unit.

Blake said yesterday that he was also retreating from certain product segments that also were pegged for growth, such as pricey furniture and fitness equipment that Home Depot sells online and in catalogs.

"We're trying to be very focused on the main things we need to deliver," Blake said.

Many of Home Depot's proposed fixes for its storefronts were similar to those discussed in years past. Executives talked at length about clearing the aisles of clutter, cleaning up stores and freshening the shelves with a better mix of products.

Store managers also plan to hire "master trade specialists," which harkens back to Home Depot's younger days, when the company recruited retired plumbers and electricians to advise do-it-yourselfers and contractors on their purchases.

The focus on retail basics comes on the heels of a turbulent run by former chief Nardelli, who was criticized by some employees and shareholders for focusing on cost-cutting and other financial metrics at the expense of store morale.

"Home Depot ... effectively [said] they had moved in the wrong direction for the last five years, but that they will turn the ship towards investments and customer service in a massive way to regain share," wrote analyst Gary Balter of Credit Suisse Holdings USA in a research note.

Wall Street didn't immediately warm up to the outlook. The stock closed at $39.59, down 23 cents.

Blake acknowledged in a roundtable with reporters that there wasn't a lot of groundbreaking material in his strategy.

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