Home Depot: Avoiding Shares Until Management Takes Charge

Yesterday I posted an article about Lowe's (LOW), saying "I thought earnings would have been worse". Today, after Home Depot's (HD) earnings I am thinking "wow, that bad?"

The Home Depot reported Q1 consolidated net earnings of $356 million, or $0.21 per diluted share, compared with $1.0 billion, or $0.53 per diluted share, in the same period in fiscal 2007 (60% drop). These results reflect a nonrecurring charge of $543 million due to the recently announced closing of 15 stores and removal of 50 stores from the future growth pipeline. Excluding this nonrecurring charge, the company reported consolidated net earnings of $697 million, or $0.41 per diluted share (22% drop).

There are times that "charges" are just that and can be discounted. This is not one of those times. Consider store sales experienced a drop of 6.5 percent. Due to the 14th week in the fourth quarter of 2007, first quarter benefited from a seasonal timing change that added approximately $536 million to sales. Taking this extra week of sales out would decrease net income by another $10 million or another penny per share.

Home Depot has been late in enacting cost cutting moves, whether it be stores closings or operational ones. With housing not rebounding before next year, investors ought to expect more of both.

If you believe that Home Depot's service issues are behind it, think again. Unlike Lowe's (LOW), Home Depot seems to be consistently playing catch up. There does not appear to be a plan here, just a reaction to events. This all began last year with the sale of the Supply unit and the announced and now canceled share repurchase.

Until some type of plan emerges, I will be avoiding shares. Even if macro conditions do improve, management has not shown any ability to run things in a specific direction.

Disclosure: No position.

Comments

[User 26737]

Cannot understand Home Depot attitude towards "service" or better said "lack of service". HD emphasized service during its growth years with a hungry management team.

[notsosmart]

user26737 is so right.

[CustomerServant]

I have to question some people when they say that customer service is lacking. I work in a home depot and there are many times when i am treated as a servant instead of a service person. There are many times when one person is covering 2 or more departments. I have had as many as 4 department phones on me at one time. I take the customers as they come, and have told some that they are next or 3 or 4 customers back. Also, since I work in one department, i may not know everything about others. I would ask the customers not get angry at employees who are trying their best to help them and others.
I understand that it is frustrating to customers that they cannot get help right away. Think how the employees feel. You get mad at us and then we get mad because we are treated badly for the fact that we are the only ones there. It makes some feel like they just want to get off the sales floor, or hide somewhere that there are not people yelling and whistling at us.
We are customers too and we understand how you feel... the fact that stores don't "have the hours" to fully staff all departments isn't our fault. We are trying to do our best with what the company has given us.

[billddrummer]

Well put, Customer Servant. I work at BBY, and we've experienced the same kind of labor cutbacks you have. Unfortunately, too often I think the decisions to cut back labor are made too far away from the sales floor (read: Corporate) and impact stores that are busy (like yours) more drastically than stores that aren't. But what happens then is that customers see that you're overwhelmed, get frustrated, and leave the store. That drives down sales even more, and leads to further labor cutbacks.

If store managers (I mean general managers, not department) had a bigger say in how labor hours were allocated, it would go a long way toward alleviating the stress that all retailers are feeling now.

Let's face it: The only variable cost as far as corporate goes is labor. But if you give the GM a labor bucket and let him/her allocate it according to the store's individual needs, it would definitely help both customer service and morale.

[grumpy4517null]

As both a customer and a shareholder in HD, I am distressed by the deterioration of the company. If I need two wangets and a giget to do a job, It seems like they have the wangets but not the gidget (Which the computer says "they have 200 of them", But the space on the shelf says "Dusty and Empty". So, hop in the car and head to Lowes, (Where I should have headed to first) and where I am begining to learn, Will have all of the parts I need in order to start and finish the job. HD has lost its edge and how it will regain it and recapture its lost customers from lowes is beyond me, But it needs to do something before it becomes irreversible.

[User 239889]

This is great news!