Housing Slowdown Hits Home Depot

New CEO Frank Blake vows to improve performance after sales and profits slump in its latest quarter

The Home Depot's (HD) sales continued their downward spiral during recent months, as the home improvement retailer struggles to recover from a host of problems. But new CEO Frank Blake promised to fight off the retailer's competition even in the face of a slowing market for housing-related business.

The Atlanta-based company's net earnings amounted to $925 million during the three months ended Jan. 28, down 28% from the same period of 2005. "Reflecting the challenging housing market, our 2006 retail results were disappointing," said Blake in a press release Feb. 20.

Business has been going from bad to worse. Home Depot's sales at stores open more than a year fell 6.6% year-over-year during the fiscal fourth quarter. During the third quarter, sales had declined 5.1%. When Blake took the reins from CEO Bob Nardelli in January, he inherited a company of disgruntled employees, investors, and customers (see BusinessWeek, 1/15/07, "Out At Home Depot").

To be sure, Home Depot's overall sales totaled $20.3 billion, a 4% increase year-over-year - but the mean analyst estimate had been for $20.8 billion, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

The shares lost 0.4% to $41.62 in early afternoon on the New York Stock Exchange Feb. 20.

Blake started his new job by reaching out to investors. The company said on Feb. 12 that it's thinking about selling the business unit HD Supply, as had been suggested by David Batchelder of Relational Investors, an activist investment firm. HD Supply provides services to professional contractors and had been criticized as distraction from Home Depot's core business

(see BusinessWeek.com, 2/12/07, "A Wholesale Change at Home Depot").

"We believe that macroeconomic factors will be challenging for HD in the near term, but we expect re-investment in the company's retail store base to have a positive long-term effect on sales and margins once a rebound in housing takes place," Standard & Poor's Equity Research analyst Michael Souers said in a note. S&P kept its strong buy recommendation on the stock, but cut its earnings per share estimate for Home Depot to $2.72 from $3.09 and initiated fiscal year 2009's at $3.04.(S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)

While Home Depot is struggling to get back on its feet, rivals are closing in. Lowe's Companies (LOW), for example, has gained more than 216% in market value since 2000, while Home Depot's shares have fallen 19%, according to Yahoo. The industry is in survival mode as the housing market slows, spurring on a dog-eat-dog battle for customers who have become less interested in buying home improvement products.

Still, Blake promised to focus on defending his company's turf. "We may not be able to impact the housing market or general economic conditions, but we know that we can improve our performance relative to our overall market share. That will be a central point of emphasis for us in 2007 and beyond," he said in the statement.