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Home Depot Sheds Units

The retailer shuts its EXPO stores as consumers cut home remodeling budgets and reaffirms its 2008 sales and earnings guidance

As consumers slash their budgets for high-end kitchen designs and showplace-quality bathroom remodels, the world's largest home-improvement retailer is cutting back, too. Atlanta-based Home Depot (HD) announced on Jan. 26 that it would shutter 34 EXPO design stores.

These high-end home warehouses offered everything from professional design services to eco-friendly granite countertops and chef-worthy Aga stoves. Home Depot also announced it would close five YardBIRDS stores, the smaller-format home-improvement chain that it acquired in 2005, two Design Center stores, and a bath remodeling business known as HD Bath, with seven locations.

On top of the 5,000 jobs that would be eliminated through store closures, Home Depot also said it would be cutting approximately 2,000 jobs, including 10% of its officer ranks. The retailer also said it would freeze the salaries of all of company officers, but was careful to note that it planned to continue offering merit increases to non-officer associates, as well as bonuses, and that it would continue paying the company's 401(k) matching contribution. Home Depot's stock, helped by news that existing home sales rose 6.5% in December, was up more than 4% in afternoon trading.

Simplifying the Strategy

The news that most cheered investors, however, was most likely the reaffirmation of the company's 2008 sales and earnings guidance. Home Depot confirmed that it expects fiscal 2008 sales and earnings to decline 8% and 24%, respectively. Said Credit Suisse analyst Gary Balter: "Everybody wants to own these stocks if they feel there are no more negative surprises coming."

The move to get rid of the EXPO stores is yet another step in CEO and Chairman Frank Blake's efforts to simplify Home Depot's strategy since replacing former CEO Robert Nardelli in early 2007 amid a difficult housing market.

Blake sold the company's supply business, which catered to the construction industry, in 2007. (It retained a 12.5% stake and also included a charge for writing down half of that equity interest in today's announcement.) Closing the EXPO stores has the same goal, Home Depot said in its announcement: "Continuing this business would divert focus and resources from the company's core 'orange box' stores."

It's also a sign that any sustained recovery in the housing market, despite the upbeat December home sales figures, is still a long time coming. "I'm sure with the kind of top-line pressure they're seeing, there's very little expectation for any kind of recovery in the near term," said Stifel Nicolaus analyst David Schick.

Burnishing the Brand

While 2007 had been one of the EXPO stores' better years, Blake noted in a conference call with analysts, today's announcement didn't come as a surprise, as the company has been trimming the number of stores. "It's kind of like trying to watch a plane take off," Blake said. "Is this going to get some altitude?… In fact, things got worse and then dramatically worse." Chief Financial Officer Carol Tome noted in the call that EXPO store sales were forecast to drop 20% or more in 2009, before the decision was made to shutter them.

Analyst Schick noted that one upside of the shuttering of EXPO's stores is clearer brand positioning for Home Depot. "It's a kind of a confusing thing to say 'here's my best store, and here's my best store even better,'" said Schick, who believes the EXPO stores may have allowed home-improvement competitor Lowe's (LOW) to come in with a slightly more high-end warehouse store. "What you should do is deliver a store that makes the optimal mix of selling high-end, midrange, and lower price-point products," said Schick.

McGregor is BusinessWeek's management editor.

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