Home Depot: Home Improvement Mecca Struggles to Stay Steady
Andrew Leckey

Home Depot Jobs & Careers, Quote | Opinion | Profile | Chart

2010 Financial report (fiscal year ended Jan. 30, 2011):

Net sales: $68 billion

Net loss: $3.3 billion

Q. I am a customer and shareholder in Home Depot Inc. Despite the economy, are there good prospects ahead?

A. The results of the world's largest home-improvement specialty retailer are tied to consumers' willingness to buy for their homes and to the operating efficiency of the company.

The question for stock investors is whether both factors will be strong enough to provide robust returns going forward.

Despite a drop in sales in its first fiscal quarter ended May 1, net income rose 12 percent to $812 million as costs declined, profit margins increased and the company aggressively bought back its shares. Over the past three years, the firm updated its distribution network as well as the technology tools that control store inventory, pricing and sales.

Home Depot (HD) shares are up 4 percent this year following gains of 21 percent last year and 26 percent in 2009. In good financial shape, the retailer announced its 97th consecutive cash dividend at its shareholders meeting in June.

The company offers products and services for home construction, renovation, remodeling and maintenance. It operated 2,245 stores at the end of the first quarter, with almost 2,000 of those in the U.S. and the rest primarily in Canada, Mexico and China.

The maturity of the U.S. market and price competition with Lowe's Companies Inc. may constrain sales here, while overseas markets, despite their growth potential, can be unpredictable and volatile. Home Depot closed a store in China in the first quarter, and numerous news reports have documented the company's difficulties in that country.

Consensus analyst recommendation on Home Depot stock is "buy," according to Thomson Reuters, consisting of 10 "strong buys," eight "buys," 11 "holds" and one "sell."

The economy and housing are showing positive signs of stability with consumer spending on small projects increasing, noted Zacks Investment Research, which has a long-term neutral recommendation on the stock. It added this caution: "We believe that spending on big remodeling projects will likely remain under pressure in the near term."

Chairman and CEO Frank Blake cut back Home Depot's portfolio of businesses to focus on its traditional stores. While it ranks first in industry sales, it must combat the perception of second-place Lowe's having more attractive stores, stronger customer service and advanced information technology.

Earnings are expected to increase 14 percent in the fiscal year ending January 30, 2012 and 16 percent the following fiscal year. The five-year annualized growth rate is forecast to be 13 percent compared to 15 percent expected for the home improvement industry.

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