Tuesday, February 20, 2007

Weak US housing market hits Home Depot

Weak US housing market hits Home Depot
By Andrew Ward in Atlanta
Copyright The Financial Times Limited 2007
Published: February 20 2007 13:49 | Last updated: February 20 2007 13:49

Home Depot on Tuesday reported a 28 per cent decline in fourth-quarter net profits, as weakness in the US housing market depressed spending on home improvement projects.

The results exposed the challenge faced by Frank Blake, Home Depot’s new chief executive, as he attempts to restore growth to the world’s largest do-it-yourself retailer.

Mr Blake replaced Bob Nardelli at the helm last month following months of unrest among shareholders about the company’s sluggish performance and controversial executive compensation practices.

Home Depot has been struggling since a long period of expansion in the US housing market ground to a halt last year, removing one of the company’s main sources of growth.

Retail sales fell 2 per cent during the fourth quarter, or 6.6 per cent if the contribution from new stores is excluded.

Net profits were $925m, or 46 cents a share, compared with $1.3bn, or 60 cents a share, in the same period last year.

The results included a 4 cents a share charge related to the $210m severance package awarded to Mr Nardelli following his resignation.

The hefty pay-off sparked uproar among activist investors because the company’s share price lost 8 per cent of its value during Mr Nardelli’s six years in charge.

Excluding the impact of executive severance, fourth-quarter earnings met Wall Street’s consensus forecast of 50 cents a share.

Total revenues rose 4 per cent to $20.3bn, driven by expansion in HD Supply, the company’s whole sale division.

Mr Blake announced last week that Home Depot was considering the sale or spin-off of HD Supply, which provides construction and maintenance materials to commercial customers.

The decision represented a sharp reversal from the strategy pursued by Mr Nardelli, who invested about $8bn in the wholesale business.

Sales from HD Supply increased 64.4 per cent to $2.9bn – nearly 15 per cent of total revenues – in the fourth quarter, following a series of acquisitions.

Expansion into the wholesale sector has been unpopular with many investors, who complain it has lower margins than retailing and diverts resources and management attention from the core business.

Disposal of HD Supply would allow the company to refocus on its flagship store chain, which has been outperformed by Lowe’s, its biggest rival, over recent years.

“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,” Mr Blake said in a statement.

“That will be a central point of emphasis for us in 2007 and beyond.”

Mr Blake is expected to set out his strategy and the business outlook for this year at an investor conference at Home Depot’s headquarters in Atlanta next week.


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