Home Depot, that’s who - at least as long as HD Supply remains wrapped up inside Big Orange.
Home Depot Inc. announced dismal retail news in its fourth-quarter financials on Feb. 20, while the wholesale operation the company is considering selling produced a few bright spots. The results and comments made by top executives during a conference call to discuss the news raise questions about how serious Home Depot may be about selling HD Supply.
“2006 was a great year for Supply,” said Joe DeAngelo, chief operating officer and executive vice president. Here are some Home Depot supply side highlights:
The construction market certainly took its toll. Margins, for example, were considerably less than reported in the fourth quarter of 2005, and the company added that the sales increases were also the result of acquired companies rather than growth. Still, not bad considering fourth quarters are typically the construction industry’s toughest and national housing starts fell 13% last year, the biggest drop in 15 years.
“The business exceeded expectations for the year, despite softness in the residential construction market, said Frank Blake, chief executive officer. “It also clearly gained market share in the fourth quarter and throughout the entire year.”
Meanwhile, on the better-known retail side, sales, customer transactions and average purchase all fell in the fourth quarter. Same-store sales for stores opened at least a year were down 7%. Retail sales for the year grew just 3%.
Bad news like this drove profits down 28% for the quarter and 1%down for 2006 - the company’s first annual earnings drop in its history.
So what you have is a sagging retailer exhausted after conquering the U.S. home-improvement market propped up by high-flying, up-start wholesalers eager to do the same to the building supply market - which the retailer wants to sell.
“Why then would we even consider selling Supply?” Blake added. “We are past, present and future a retail business.”
Blake implied that much of the decision on what to do with HD Supply would hinge on how well wholesale operations could be integrated into retail operations. Some Wall Street pundits say that any synergy between the wholesale and retail sides - buying products, for example, for both divisions from the same manufacturers - might be more trouble than it’s worth.
Before getting too far into the process, Blake would rather weigh his options now since any subsequent sale would be made more difficult.
“If we can create more shareholder value now,” he added, “through a sale or other alternative, then that's what we will do. If not, we won't."
Home Depot may discuss more details at its investor and analyst conference, Feb. 28.
by Steve Smith
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