Home Depot cutting prices sharply

With the home improvement sector hurting even worse than most retail categories, Home Depot has decided that price cuts are the solution.

In an effort to pick up share from Lowe's and Wal-Mart in a pinched home-improvement segment, Home Depot is cutting prices between 5% and 50% on some 1,200 items. The discounts, which Home Depot expects to be permanent, will go into effect (immediately) and roll out during the next three weeks.

There's no doubt that HD is hurting ("sales fell 3.4% in the first quarter and 5.4% during the second quarter. Sales at stores open at least year dropped 6.5% in the first quarter and 7.9% during the second quarter"), the question is whether price cuts will do anything other than depress margins throughout the sector if competitors match the cuts.

An analyst note from Deutsche Bank warns that the promotions could hurt margins, if competitors counter Home Depot's promotion scheme. "The key here is that in this tough macro environment, we're not sure if incremental price promotions will even drive meaningful sales growth," the note states.

A trade promo tactic I don’t recommend

Anytime I’ve worked on helping a client set up their trade promotion management system, one of the first questions is, “What are the promotion types you will need to track?” The answer is usually a fairly predictable list: Ad (sometimes broken down by media type), Display, TPR, maybe Signage, sometimes Slotting, and so on.

Occasionally, there’s a surprise, but to date I’ve never come across “Bribes” as one of the spending categories. I hope I never will, but it looks like a possibility.

According to this article, Home Depot has recently fired a few buyers who were living quite nicely on the largesse of some of their suppliers:

A $53,000 cashier's check to buy a 2006 Infiniti SUV. A $33,500 check to pay off a 2004 Cadillac Escalade. Home improvements worth $98,000, complete with a home theater and Sub-Zero appliances. And $400,000 in cash.

These were the tools allegedly used by at least five flooring manufacturers from China to Venezuela to hoist their products onto the shelves of home improvement giant Home Depot.

The cars, cash and renovations detailed in court records allegedly were taken as kickbacks by two former Home Depot flooring buyers, among four fired last summer for violating company policies.

What prosecutors say happened at Atlanta-based Home Depot — the world's second-largest retailer — is an example of the cutthroat nature of gaining what's considered prime real estate in the retail industry: big-box shelf space.

In case it sounds tempting (might be cheaper than slotting), it appears that the suppliers have been bounced or are being reviewed. It wouldn’t surprise me if the DoJ decided to join the review.

Quick notes

The NRF is forecasting slower retail growth for 2007. "... NRF is predicting industry sales gains of 3.8% in the first quarter, 4.6% in the second, 5.2% in the third, and 5.7% in the holiday quarter."

Home Depot investors are suing to stop Nardelli's platinum and diamond-encrusted parachute. And it may bring on government action: "U.S. Rep. Barney Frank, chairman of the House Financial Services Committee, said the severance deal was 'further confirmation of the need to deal with a pattern of CEO pay that appears to be out of control.'"

The Telegraph reports that India's long-anticipated retail opening could be finally here. "The Indian government could lift restrictions on foreign investment in its retail sector as soon as next month, paving the way for British store groups such as Tesco and DSG International to open massive chains in the country."

The Home Depot severance package

Off-topic a bit for a TPM blog, but I can’t resist commenting on the $200+ million severance package Home Depot just gave Bob Nardelli, the CEO who spent the past six years driving down the stock price, for which he was handsomely remunerated.

Nardelli and Home Depot have agreed to terms of a separation agreement that would provide for payment of the amounts he is entitled to receive under his pre-existing employment contract entered into in 2000. Under this agreement, Nardelli will receive consideration currently valued at about $210 million.

The package includes a cash severance payment of $20 million, the acceleration of unvested deferred stock awards currently valued at approximately $77 million and unvested options with an intrinsic value of approximately $7 million. It also includes payments of earned bonuses and long-term incentive awards of approximately $9 million, account balances under the Company's 401(k) plan and other benefit programs currently valued at approximately $2 million, previously earned and vested deferred shares with an approximate value of $44 million, the present value of retirement benefits currently valued at approximately $32 million and $18 million for other entitlements under his contract which will be paid over a four-year period and will be forfeited if he does not honor his contractual obligations.

I’ve never really agreed too much with the critics of “excessive” compensation for top executives (nor excessive compensation for movie stars or athletes). I figure if people achieve their goals in terms of creating income/profits/share price increases, they should be compensated accordingly.

Nardelli’s case (and it’s not unique, except in its size) is reminiscent, though, of a baseball owner (it may have been George Steinbrenner) who was asked if he resented the high price of baseball talent. He replied that it wasn’t the price of talent he objected to, it was the high price of mediocrity.

CEOs who produce should be paid plenty. Those who don’t should be booted out the door. Giving a failure $210 million to go away is wrong.

Weekend quick notes

Woolworths is the latest retailer to show an interest in India. The Australian giant is developing a deal with India's Tata Group to supply the group's retail outlets -- an opportunity for Woolies to study the market up-close. More on India here.

Home Depot has had a shake-up in its marketing ranks. Roger Adams is the new CMO -- the position has been vacant for a year. The exec-vp of merchanding & marketing is gone, as are a couple of other top folks.

Ahold's former marketing director has gone on trial for fraud. According to the government, he "booked whatever amount in income that they needed to make their targets."

Winn-Dixie looks like it will be out of bankruptcy soon. The question, as noted in the article, is whether they've figured out a way to compete with Wal-Mart. If not, how long before the next filing?

Wednesday quick notes

NASCAR is planning to increase its licensed merchandise directed toward women, recognizing that women are now 40% of its fan base. NASCAR-branded swimwear, shoes and boots, and leather jackets are among the items planned. "Sales of NASCAR's licensed merchandise have flattened at $2 billion, and the brand thinks it can boost product sales - and image - by courting female fans."

Home Depot is testing an expansion into automotive supplies. The test will consist of about 500 square feet in ten stores in the Jacksonville area.

Ahold's Tops Markets chain in upstate New York is planning to spend up to $60 million renovating stores over the next two years, and says it will "be more aggressive in its marketing, so as to better compete not only with Wal-Mart, but also with Northeast star players such as Wegmans."

Home Depot c-stores?

Home Depot may be worth a separate blog, with the number of posts about them lately. Now they're talking about getting into the convenience store business.

I don't think I understand this one.

Analyst Bill Sims with Smith Barney said some retailers use gasoline as a loss leader and a way to drive traffic into their stores.

"If Costco's doing it, and Wal-Mart's doing it, why not Home Depot?" Sims said. "I would think it would be a great traffic driver and more of a one-stop-shop."

Excuse me if "Costco's doing it, and Wal-Mart's doing it" doesn't strike me as great logic. Remember your mom saying, "If Billy jumped off a cliff, would you do it?"

Okay – it’s not that bad, but it still sounds strange to me.

I see c-stores as being a great place to pick up a loaf of bread and a gallon of milk, not a loaf of bread and a gallon of paint, which is what the “one-stop shop” part of the argument seems to envision.

Still, in one limited aspect I can see the logic, and that is as a tie-in with their foray into the professional market. I guess I can see builders drinking coffee and buying donuts in the morning as they wait for their orders to be loaded. Still, that seems a weak foundation on which to build a c-store business.

But I could be wrong.

Home Depot to slow new store openings

As noted last week (see "Home Depot going pro" below) HD is emphasizing professional business as a hedge against the challenge in the consumer segment from Lowes. This was confirmed when HD announced their plans to analysts.

Though Home Depot said it would slow new-store growth to 400 to 500 through 2010, roughly half the number opened in the previous five years, its plan to derive more sales from professional contractors was seen favorably by analysts....

Although sales to contractors is only 4% of HD's business today, it is projected to reach 18% in 2010. They are also pushing for growth in services/installation, and international expansion.

Lowes, by contrast, will be opening 150-160 stores per year on 2006-07. If that keeps up (a big "if"), Lowes will be closing in on HD in store count by 2010.

Home Depot going pro

Home Depot is paying $3.2b for Hughes Supply Inc.

The purchase is Home Depot's biggest ever and will double the size of its supply division to $12 billion in revenue, allowing the company to continue its drive to win more professional customers. Chief Executive Officer Robert Nardelli has made three acquisitions in the past year to expand beyond do-it-yourselfers.

Bloomberg speculates that the move is at least partially an attempt to diversify because of incursions into its core business by Lowe's:

Home Depot is making acquisitions as it has become more challenging to find new store locations and sales growth lags behind Lowe's Cos., the second-largest home-improvement retailer.

Home Depot has about 2,000 stores, while Lowe's has about 1,175 and is still expanding into large U.S. cities. Home Depot has boosted sales an average of 12 percent a year over the past five years, compared with an average gain of 18 percent at Mooresville, North Carolina-based Lowe's.