Looks like Home Depot may do some remodeling. The Atlanta-based retailer announced February 12 that it is considering a sale, spin-off or initial public offering for its wholesale business, which sells supplies and services to contractors.
Such a move would wipe clean the fingerprints left by former CEO Bob Nardelli. He led the retailer on an $8 billion shopping spree that created the division. Nardelli once hoped the wholesale-supply unit, which sells lumber and other materials to professional builders and furniture to hotels, would make up 20% of revenue by 2010. The division now generates about $12 billion in annual sales, or 12% of the company’s revenue. But Nardelli was ousted in January over his plush pay package and the company’s mediocre financial performance.
Frank Blake, Home Depot’s new boss, has plenty of reasons to bid farewell to Nardelli’s creation. Blake is feeling the heat from activist investor Ralph Whitworth. His company, Relational Investors, won a seat on Home Depot’s board on February 5 as a peace offering to avoid a proxy battle. Whitworth has called the wholesale division “strategic adventurism” and advocates that the company exist the business soon.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Whitworth may have a point. Selling to building pros has lower operating profit margins than Home Depot’s traditional retail operations. For the first nine months of 2006, the wholesale-supply business generated 7% operating margins, while its chain of big-box stores sported 12% margins.
Catering to professionals has distracted Home Depot from its core retail business, says Morningstar analyst Anthony Chukumba. Prime example: At last year’s annual meeting, Home Depot executives said the company would slow new-store growth over the next few years to focus on the wholesale-supply unit. A spin-off would put the focus back on Home Depot’s more profitable business. “Although there is no assurance a transaction will occur, we view the announcement as a significant shift in strategy,” Chukumba says.
Generally, analysts support the spin-off but are unsure of how it will affect the company and its shares. Robert W. Baird & Co. analyst David Manthey favors a spin-off or sale because it would “create a large pure-play distributor.” The wholesale unit might fetch as much as $13 billion, estimates Colin McGranahan, an analyst with Sanford Bernstein & Co.
The possible deal has one noteworthy critic: Mad Money’s Jim Cramer. Nardelli cobbled together building suppliers to create Home Depot’s wholesale division at the height of the housing bubble. The company paid top dollar for its acquisitions. Now, Home Depot may sell at the low point, Cramer says, which is “pathetic corporate America idiocy at its worst.”
The dust has yet to settle on Blake’s makeover of Home Depot. Regardless of what happens with the wholesale division, the worst of the housing market slowdown is behind us, says A.G. Edwards analyst Brian Postol, and that will cause sales and profits at Home Depot to improve. “As fundamentals begin to show gradual acceleration, we believe investors will start to take notice.” The stock (symbol HD) gained 33 cents, or 0.77%, on February 13 to close at $41.76. It trades at 15 times the average analyst earnings estimate of $2.84 per share for the fiscal year that ends January 2008. Postol thinks the stock is worth $46.
-
Stock Market Today: Dow Dives 1,123 Points After FedMarket participants reacted predictably to a well-telegraphed hawkish turn by the Federal Reserve.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are SayingFederal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are Saying
Federal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
The Best Retail Stocks to Buy This Holiday SeasonE-commerce is a growing trend, but most folks still prefer to shop in stores. That makes these dominant retail stocks worth a closer look.
-
Stock Market Today: Stocks Retreat on Renewed Inflation, Interest Rate QuestionsStocks were lower and yields were higher on Tuesday, with markets reflecting the uncertain transition from campaign promises to real-world policies.
-
Is Home Depot Stock Still a Buy After Its Beat-And-Raise Quarter?Home Depot stock is struggling for direction even after the retailer's strong earnings and full-year outlook, but Wall Street isn't worried. Here's what you need to know.
-
Why Is Warren Buffett Selling So Much Stock?Berkshire Hathaway is dumping equities, hoarding cash and making market participants nervous.
-
Fed Cuts Rates Again: What the Experts Are Saying
Federal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
If You'd Put $1,000 Into Google Stock 20 Years Ago, Here's What You'd Have TodayGoogle parent Alphabet has been a market-beating machine for ages.
-
Fed Goes Big With First Rate Cut: What the Experts Are Saying
Federal Reserve A slowing labor market prompted the Fed to start with a jumbo-sized reduction to borrowing costs.
