The Home Depot Inc. (HD) is the leading player in the highly fragmented home improvement industry. The company has reinvigorated itself with a shift in focus from new square footage growth to maximization of productivity through its existing store base.
In addition, the company has implemented significant changes to its store operations in an effort to make them simpler and more customer friendly, thereby inducing more customer traffic.
Home Depot enjoys large economies of scale while purchasing products and offers 30,000 to 40,000 proprietary and exclusive brands annually through strategic alliances with selected suppliers across the globe. The company follows a global sourcing merchandise program that enables it to purchase market leading innovative products directly from the manufacturers, giving it a competitive price advantage.
Due to the continued economic downturn, Home Depot has taken strategic steps to optimize its capital allocation and concentrate on core business activities. The company has closed its underperforming stores, reduced its new store opening pipeline, and exited businesses like EXPO, THD Design Center, Yardbirds, and HD Bath.
Home Depot follows prudent inventory management policies that maintain a favorable in-stock rate. Moreover, the company has improved its supply chain and streamlined its operations.
Home Depot recently posted second-quarter 2010 earnings of 72 cents a share, beating the Zacks Consensus Estimate by a penny. Net sales in the quarter increased marginally by 1.8% but fell short of the Zacks Consensus Estimate of $19,584 million.
Although the economy is showing signs of improvement, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes, inventory levels regularize and consumer-spending rebounds. However, we continue to witness strength in consumer spending on small projects such as basic repair and maintenance projects and simple décor. The company forecasts fiscal 2010 sales growth of 2.6%.
Currently, we remain Neutral on Home Depot. Moreover, the stock holds the Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation and correlates with our long-term view.