ATLANTA – Home Depot Inc. on Friday scaled back its earnings outlook and new-store openings for the next three years, but the company's stock rose as investors were relieved that the news was not as bad as expected.
Shares of Home Depot, the world's No. 1 home improvement retailer, closed up $2.64, or 6 percent, at $46.66 on the New York Stock Exchange.
Home Depot told a meeting of about 150 analysts in Atlanta that it expects earnings to increase 18 percent to 20 percent annually over the next 12 quarters.
Home Depot Chief Executive Robert Nardelli said the company would open 200 new stores a year over the next three years, down from the pace of previous years. Home Depot originally planned to open 225 stores this year.
Some investors said the earnings forecast, while down from growth rates in previous years, was better than expected.
John Waterman, chief investment officer at Rittenhouse Financial Services, a Radnor, Pennsylvania, firm that owns Home Depot stock, said he was expecting earnings to grow 15 to 18 percent.
"To slow down the new-store openings and focus more on returns on investment and on improving efficiency and managing costs makes a lot of sense at this stage in Home Depot's growth cycle," Waterman said.
The revised forecast represented a shift in strategy for Home Depot, which traditionally relied mostly on store openings to drive growth. Now, the company says it will cut costs and improve efficiencies at existing stores while venturing into adjacent businesses to boost earnings and revenue.
Since leaving General Electric Co. to take over Home Depot last year, Nardelli has reduced store inventory, negotiated better payment terms with vendors and accelerated the roll-out of programs to reduce store clutter and cater more services to professionals to boost profitability.
In fiscal 2002, the company will add 184 Home Depot stores, 10 specialty Expo Design Centers, four stores for the professional customer, and two Home Depot Urban stores, which are smaller than the typical Home Depot warehouse store.
Home Depot has more than 1,200 existing stores in the United States, Canada, Mexico and Puerto Rico.
"We're going to continue to build 200 stores, but those 200 stores will have a different shape, size and fit," Nardelli told reporters following the meeting with analysts.
Nardelli, who will also become chairman of Home Depot next year, said store placement would become "much more targeted," as the company expands to apartment and rural settings to tap new sales.
Merrill Lynch analyst Peter Caruso said the new-store forecast amounted to square-footage growth of about 14 percent, down from 20 percent to 22 percent in prior years.
Changing Economics
Atlanta-based Home Depot, like its competitors in the retail sector, has been hit hard by an economic slowdown in its key U.S. market. Few observers see a sharp rebound any time soon.
"The world has changed. We are in a different economic period," said Nardelli, adding that sales in the home improvement sector were expected to be flat this year and grow modestly over the next three years.
But Home Depot said it sees its revenues rising 15 percent to 18 percent annually from 2002 to 2004 and is on track for revenues of $100 billion by 2005, about double the $53 billion it expects for fiscal 2001, which ends early next year.
Nardelli reiterated the company's earnings expectations of 28 cents a share for the current fiscal fourth quarter and $1.27 a share for the full year, in line with analysts' consensus forecasts compiled by Thomson Financial/First Call.
But some analysts said the Home Depot growth forecast could indicate good news for the company's archrival Lowe's Cos. Inc. "We see enhanced real-estate opportunities for Lowe's as Home Depot slows down its store expansion," said Deutsche Banc Alex. Brown's Dan Wewer.
Last week, Lowe's, which is rapidly opening stores in big markets to compete head-to-head with Home Depot, said it sees per-share earnings rising 18 percent in 2002 and 20 percent in 2003.
Shares of Lowe's, which have risen more than 90 percent this year, outperforming Home Depot, were up $1.79, or 4.1 percent, to close at $45.31 on the NYSE.
Going After Competition
To help spur growth, Nardelli said Home Depot would also seek to curb cannibalization of its stores and try to win customers from competitors by offering new services such as lawn care and plumbing repair.
Cannibalization, which occurs when new stores hurt sales at existing ones, was seen as a factor that led Home Depot to report flat third-quarter sales at stores open at least a year.
A program targeting professional customers such as contractors would be expanded to about 966 stores in 2002 from 500 by the end of fiscal 2001, Home Depot announced.
The company also revised plans for Expo Design Centers, its design chain that has been hurt recently as consumers shied away from big-ticket purchases such as $12,000 stoves. Expo's growth rate will slow from about 70 percent per year to 25 percent a year, Home Depot said.
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