Thursday, October 20, 2005

Home Depot Braces for Pop

About a week ago, The Boy in the Big Housing Bubble raised the issue of what companies like Home Depot might suffer when the housing bubble pops. And then today, MarketWatch's Chicago Bureau Chief, Jennifer Waters, writes of how the company has prepared for the inevitable cut in house sales:
CHICAGO (MarketWatch) -- Home Depot Inc. shares reached their highest point in more than a month Thursday after an analyst said the company's well positioned to handle the triple threat of a bursting housing bubble, higher energy prices and slowing consumer spending.

... As for diversification, Telsey repeated what other analysts have said in recent weeks: Home Depot's girding itself well for a housing slowdown amid what she called "an ever-saturated U.S. home-improvement landscape."

The company's doing so, she said, by pumping up its builder, professional supply and maintenance, repair and operations markets -- broadly referred to as Home Depot Supply.

In July, for example, Home Depot acquired National Waterworks Holdings, a distributor of products used in water and wastewater transmission systems.

"The attractiveness of these market places is a function of their high fragmentation, lower capital-investment requirement, and the ability to leverage the existing infrastructure and gain cost synergies," she said.

Indeed, the parent is projecting that Home Depot Supply will see revenue rise at a 25% clip compared with total revenue forecasts calling for growth in a range of 9% to 12%. Telsey thinks the company will well exceed that forecast.

"In our view, revenues will continue to more than double the increase in retail revenues over the next few years," she said.

But here comes the caveat. In Telsey's view, profit margins generated by Home Depot Supply are generally below-average, meaning they will put pressure on the company's overall gross margin. To overcome that, Home Depot is bundling certain services and products where price is not that big an issue for customers, which she thinks will help the company "avoid commodity-like margins."
— The Boy in the Big Housing Bubble