When Home Depot began acquiring businesses that sold directly to contractors, home builders and other business customers, then CEO Bob Nardelli saw the creation of a new business unit (HD Supply) serving these markets as a means to offset any turndown that might occur in the housing market.
A number of things have changed since Mr. Nardelli and the Home Depot board mutually agreed he should depart from the company. The latest change may mean the outright sale, spinoff or initial public offering of HD Supply.
Frank Blake, the man who replaced Mr. Nardelli as chairman and CEO of Home Depot, said in a company press release: "We are undertaking this action today because of our desire to increase our focus on our retail business. With annual revenues of approximately $12 billion, HD Supply is a healthy, growing and vibrant business, and we are undertaking this evaluation to determine whether there are strategic alternatives with respect to HD Supply that would optimize shareholder value."
Home Depot has been under pressure from analysts and others to do something with the division to create some value for shareholders.
The Associated Press reported on a note written by Banc of America Securities analyst David Strasser. "While we had long been advocates of the HD Supply business, the market never seemed to warm up to the strategy, viewing it more as a lower margin, lower return distraction from retail."
According to Mr. Strasser, the announcement about seeking alternatives for HD Supply demonstrated that "Frank Blake is focused on value, and taking a fresh look at every aspect of the business."
Mark Rowen, an analyst with Prudential Equity Group, believes the sale of HD Supply could be a large mistake as it focuses all its business in retail, which may be nearing its point of saturation in the company's core U.S. market.
"We believe that Home Depot will continue to struggle with the effects of a difficult housing market in the near term, as well as intense competition from archrival Lowe's longer term," Mr. Rowen wrote.
Discussion Questions: What should Home Depot do with its HD Supply division? What would the ramifications be for Home Depot if they were to follow your advice?