Home Depot in Neutral Lane

We reiterate our ‘Neutral’ recommendation on The Home Depot Inc. (HD). The company has been able to optimize capital allocation and concentrate on core business activities by following the strategy of shutting down underperforming stores. However, relentless job losses and a consequent check on consumer discretionary spends keep us cautious on the stock.

Home Depot 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 to make them simpler and more customer-friendly, thereby inducing more customer traffic.

Additionally, with the introduction of new warehousing and transportation system, the company has been able to improve its supply chain while minimizing cost. This has also helped Home Depot to improve its Central Automated Replenishment System to facilitate immediate refill of stock along with reducing the investment in inventory.

On the flip side, heavy job losses and reduced access to credit have led to a sharp fall in consumer discretionary spending on big-ticket items, hampering the company’s sales. Home Depot has narrowed its 2010 full-year sales growth guidance to 2.2% from 2.6%.

Home Depot’s exposure to international markets also makes the firm susceptible to currency fluctuations. The strong U.S. dollar may adversely affect the top- and bottom-line results. Moreover, the company’s selective acquisitions and strategic alliances with third parties, in a drive to expand market share, may prove to be a boomerang, making it vulnerable to operational risks.

Home Depot’s business remains highly competitive, primarily on counts of customer services, price, store location and assortment of merchandise. The company faces stiff competition from Fastenal Co. (FAST) and Builders FirstSource Inc. (BLDR).

Home Depot holds a Zacks#2 Rank, which translates into a short-term Buy recommendation.

HOME DEPOT (HD): Free Stock Analysis Report

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