Home Depot

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A recent article in Business Week highlighted the CEO of Home Depot, Bob Nardelli, and his efforts to revamp operations at the giant. It’s competitor, Lowe’s, stock price has soared the last few years where Home Depot has largely missed out on the housing boom. One of the reasons for this is Home Depot’s small professional sales. Lowe’s garners a lot more of the professional contractor market whereas Home Depot is more of a consumer and homeowner store. The store also has an Innovation Center where they experiment with how new products will match in their stores. All of these initiatives are to increase earnings.

However there are several flaws in this approach. One is the waning real estate boom. Even if Home Depot gains a foothold in the professional market, that market is shrinking as home sales slow. As interest rates rise, Home Depot’s backbone, homeowner’s remodeling, will find it more difficult to get home equity loans. Big renovation projects will be delayed and this effect will more hten cancel out any gain in professional sales.

The final few reasons why I would avoid Home Depot is the CEO himself. He is going against the management crowd by centralizing and consolidaqting power in the home office. His former military background is criticized as heavy handed and is leading to many top executives leaving the company. Even many of the former military officers he likes to hire., admit if his sales goals aren’t met, the executives lose their job. This leads to a heavy focus on short term volume often at the detriment of long term investment in improving the stores and customer service. The company also is at the bottom of customer service surveys conducted, both internally and externally.

While some of the short term pushes by the CEO may lead to a temporarily boost in stock price, the increase would be unsustainable. Overall this is one stock I would avoid and consider shorting.