Home Improvement Mecca Struggles to Stay Steady

By Andrew Leckey

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, net income rose 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 offers products and services for home construction, renovation, remodeling and maintenance. It operates 2,245 stores, 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.