Many were surprised when they heard that Home Depot was closing all 34 of its Expo Home Design Centers, but if you are a regular reader of its financial reports, you certainly would have seen signs of major financial stress. Home Depot (NYSE: HD) first discussed a "store rationalization plan" in its first quarter of 2008 report. At that point, it closed 15 stores and removed about 50 stores from the future growth pipeline.
In the third quarter report (December 2008), Home Depot said, "We recognized $564 million in total pretax charges for the first nine months of fiscal 2008 related to the store rationalization plan, including $3 million in the third quarter of fiscal 2008." Clearly, the store rationalization plan was not complete and more cuts were to come.
Another sign of more cuts to come was this warning in Results of Operations, "Our international businesses began to feel some of the economic pressure that we have experienced in the U.S. in the third quarter of fiscal 2008. Our comparable store sales for Canada and China were at the Company average for the third quarter of fiscal 2008. For the first nine months of fiscal 2008, comparable store sales for Canada were above the Company average and were positive for China. Our stores in Mexico posted double digit comparable stores sales in both the third quarter and first nine months of fiscal 2008."
Based on this information, it appears that Home Depot realized that with economic pressure on the international front, it could no longer use profits from there to prop up losses in U.S. operations. One of the most telling quotes from the Results of Operations was, "Operating Income decreased 25% to $1.3 billion for the third quarter of fiscal 2008 from $1.8 billion for the third quarter of fiscal 2007. Operating Income decreased 31.7% to $4.1 billion for the first nine months of fiscal 2008 from $6 billion for the first nine months of fiscal 2007."
Clearly, Home Depot was bleeding and it had to stop that bleeding, especially once it realized that the cushion from international sales was no longer going to be there. When Home Depot finally announced that it was closing Expos, it said the concept would lose $80 million in 2009. Its operating loss was $50 million in 2008. While this helps, given the level of the bleeding, the cuts based on the store rationalization plan probably are not yet done.
As an investor reading this report, you can see that Home Depot's future undercurrent market conditions is not bright. In fact, Home Depot clearly states in its Management Discussion and Analysis that "The slowdown in the global economy and weakness in the U.S. residential construction and home improvement markets negatively affected our Net Sales for the third quarter and first nine months of fiscal 2008. Our comparable store sales declines 8.3% in the third quarter of fiscal 2008 driven by a 5.5% decline in comparable store customer transactions, as well as 2.8% decline in our average ticket to $55.86."
Expect these numbers to look even more dismal when the annual report is released in April. In Can Home Depot Rebuild?, fellow blogger Jamie Dlugosch takes a closer look at this question.
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies (2nd edition published in January) and the Complete Idiot's Guide to Value Investing.
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Reader Comments (Page 1 of 1)
2-04-2009 @ 7:40PM
william lindblad said...
Repeat of what I posted to a Sheldon Liber blog of about a week ago.
Both H.D. and Lowes will experience downsizing. Lowes, more so as they have more independent exposure. (Stores close to one another in a given geographic area without any H.D.)
Sears still has many independents (small locals) and they are going to get hit also.
By summer, quite possibly Wal Mart.
In 2007 I said this was going to be bad.
It is much worse than I could have ever imagined.
I did CYA as I don't like taking chances.
2-05-2009 @ 5:09PM
Jessy Scholl said...
William, you are right for the most part, but I think Lowes will be experiencing pressure from finances. They are a quality company that started in the 1960's and really wasn't over expanding like Home Depot (which started in 1979). Home Depot started to fail because they over-expanded while Lowes attempted to improve their product selection.
Here is a quick timeline of what I expect will happen the rest of this year.
February
1. Home Depot will close its expo centers. (already announced)
2. A major mall store (FYE) will go into bankruptcy and start to close locations.
3. The month will end with Super Valu shedding jobs and brands.
March
1. The Circuit City Liquidation will end with somewhat horrible discounts but Wal-Mart winds up with the Firedog brand.
2. Sears/Kmart will begin to shed leases before they are up. As a result, over 50 Sears stores and 200 Kmart stores will close for good. This list will include the Mall of America Sears location.
3. Choice Hotels will close down their Clarion brand, and all other locations with Suites in their name.
April
1. Jim Cramer will announce that the World will end April 13th at 13:13 local time with the start of the World's Going out of Business Sale. However, he says it with such a straight face that he announces that properties such as the London Bridge will be marked up 50% and then marked down only 10%. Yes this is a joke.
2. Bath and Body Works will become the second mall chain, in reality, to close shop in 2009.
3. Home Depot declares bankruptcy and will close 400 stores in the country including pulling out of all international markets.
May
1. California declares bankruptcy, but it is revealed that there is Real Gold in Death Valley and a law granting that gold to Diane Feinstein and her husband is overturned by the 9th circuit court.
2. The House and Senate finally agree on a Stimulus package but most of that is to fill the coffers of rich Trillionaires.
3. The FDA bans Fluoride, Aspartame, and Aspartame's cousin from the market.
4. Time Warner and CBS agree to pull the plug on the CW network.
June
1. The United States loses 8 NHL teams in one sitting as teams from Tampa Bay, Miami, Atlanta, Nashville, Dallas, St. Louis, Anaheim, and Los Angeles fold while the other team from Phoenix relocates to Grand Forks, North Dakota.
2. The entire Carl's Junior/Hardees chain goes under.
3. IHOP shutters Applebees with the option of franchises to switch to IHOP if they want to do so.
4. A major scandal hits the US Roman Catholic church and the worldwide church must sell off some locations.
July
1. Bank Failures come to a head as the Federal Reserve is bankrupt as of January 31st, 2009.
2. Wal-Mart announces that they are closing stores in towns less than 10,000 people.
3. At the end of the month, the dollar dies.
August
1. Canada, The United States, and Mexico are merged into one nation called North America and the Amero is established as the currency.
2. At this point, there are so many Going out of Business sales that when the sales are finished there will be no store left in the NAU.
September
1. The NFL merges all 32 teams into 16 in order to save money. This means that the Packers and Vikings will merge into one team called the the Packings and the New York team will be called the Gijets.
2. The NAU Government opens concentration camps that make the German variety look like total and 100% tame.
3. Martial Law is imposed on the NAU.
October
1. All Internet that does not conform to Lord Obama and the Roman Catholic Church will be shut down as of now.
2. India dies in a nuclear war.
November
1. For the first time ever, Americans don't celebrate Thanksgiving. Instead they celebrate Obamasgiving every November 4th.
2. The true Antichrist is revealed to be Lord Obama when he eats the Pope.
December
1. Christians celebrate Christmas dead.
2. The Plug is pulled on NBC, ABC, CBS, Fox, and CNN.
Yes we are screwed.
2-07-2009 @ 6:35AM
Mike said...
An insider confirmed the amero in a recent conversation...
http://truthalert.net/Get%20Out%20of%20the%20Dollar.htm
Folks should get out of the dollar.
2-07-2009 @ 6:37AM
Lita Epstein said...
Mike,
The Amero controversy is false. Check this out on Snopes:
http://www.snopes.com/politics/business/amero.asp
Lita