Home Depot May Be Reversing Course

Discussion
Feb 13, 2007

By George Anderson

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?

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8 Comments on "Home Depot May Be Reversing Course"


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Bernie Slome
Guest
Bernie Slome
15 years 3 months ago

I understand wanting to regain what Home Depot once had. I understand wanting to make changes and right the ship. The concept of the HD Supply worked. Now that homebuilding is at a low; why sell now? Wouldn’t selling now get a low price? Why not “tough it out” until homebuilding is on the rise? The same for a spin-off, going to the public market now will get Home Depot less dollars per share on an IPO than when the homebuilding is rising. Is this being done to increase shareholder value or to remove the last vestiges of Bob Nardelli?

Stephen Baker
Guest
15 years 3 months ago
I guess I’m missing the point here. Isn’t retail growth for Home Depot slowing? How many more boxes can they fit in the U.S.? What categories can they add in order to gain incremental volume? Don’t a lot of these contractors already shop in their stores? I don’t see much of a choice but to look to a highly fragmented, ripe for consolidation business where they can apply their knowledge of the market for the product, the local presence that 2000 stores bring and the buying power of $60-70 odd billion in sales. And if this scenario sounds familiar, it is extremely analogous to the office products retailers who would be struggling mightily without the volume, margin and opportunity that their catalog and corporate businesses bring to them. It appears like an attempt to wipe out Mr. Nardelli’s legacy without giving it much forethought. And if Wall Street doesn’t understand the value of HD Supply then it behooves Home Depot to explain it because once they cut it off you can be sure every analyst… Read more »
Camille P. Schuster, Ph.D.
Guest
15 years 3 months ago

Home Depot needs to decide what its core competency is: is it supplying building materials to anyone? To consumers for their D-I-Y projects? For contractors for residential projects? For contractors for commercial projects? These are different businesses requiring different skills and processes. Which consumer does HD want to own? They are right to be evaluating their options. They can not be everything to all these consumer groups. Each consumer group comes with a set of existing competitors. Where can HD have the most impact and be most profitable going forward? They need to choose.

Randy Grebel
Guest
Randy Grebel
15 years 3 months ago

Whatever the background of W. Frank Dell is, he knows enough about the distribution business that he “gets it” when it comes to HD Supply. His words are right-on about the distribution business.

The previous Home Depot management knew little about the retail home center business and even less about the world of industrial/commercial distribution.

The value of the business may be low now, but it will be even lower once the data heads HD has brought in try to sell flush valves and cement anchors from their laptops.

jack flanagan
Guest
15 years 3 months ago

“Big Orange” was (and some might argue still is) on a path to become as radioactive as Wal-Mart from many perspectives.

Given that, it’s not clear that HD Supply is a bad strategy. It might well be. However, the oft-quoted simplistic “margins are lower” is a very incomplete rationale. (Hey, grocery margins are quite a bit lower than specialty retailers).

I’ve no inside information nor have I seen any detailed analysts reports that decompose HD’s financials. However, I’d like to hear a bit more about many of the other (presumably positive) financial measures that led HD into this business.

Perhaps the analysis was flawed, perhaps the housing industry stars didn’t come into alignment, perhaps anything Nardelli pushed has become ‘de facto’ bad strategy, etc.

Mark Hunter
Guest
Mark Hunter
15 years 3 months ago

The market will never be able to fully value the Home Depot as long as it has both the retail operation and HD Supply. Look for Home Depot to spin off HD Supply as a public company but retain a shareholder stake in it. This will enable the market to fully value both sides of their business. Having them both as public companies will also increase the level of accountability within each company, thus making them both more efficient.

W. Frank Dell II, CMC
Guest
15 years 3 months ago

HD Supply is essentially a wholesale business with low margins and little value added. It competes with local lumber, plumbing and electrical wholesalers. This is tough competition, as much of the business is based on personal relationships. Any strategy must provide growth greater than the market segment short term and result in a competitive advantage long term. Just as independent food retailers have not been run out of business, neither will the local wholesaler. HD Supply would need to capture a minimum of 25% of the market to have any impact. Furthermore, it would need to offer far superior service and lower prices to change the local relationships. Also, as we have seen, Home Depot is having trouble just doing a competitive retail job. The competition continues to gain ground. It’s always good to change a failing strategy, not unlike Altria selling off Kraft.

Mark Lilien
Guest
15 years 3 months ago
The question for Frank Blake and the Home Depot board: How much can we get for HD Supply? If they can get twice their investment, it’s a no-brainer. If the market value is only half their investment, maybe it would pay to turn it around first. There’s a lot of private capital sloshing around lately, and businesses are being sold for substantially better prices. If it were sold today, it isn’t clear what price HD Supply would bring. And there’s nothing wrong with splitting it off by giving existing Home Depot shareholders the stock, after forming a separate company. It’s still not clear why Home Depot and HD Supply weren’t appropriately integrated. Yes, their current customer segments aren’t the same, but why didn’t HD Supply supplement the assortment for Home Depot, for example? HD Supply wasn’t given any visibility in the Home Depot stores. Surely some Home Depot customers would’ve found what they were looking for within the HD Supply assortment, and it could’ve been delivered directly to them. Within each category, Home Depot stores… Read more »
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