Home Depot Exits Expo Business, Reaffirms Fiscal ’08 Guidance

Jan. 30, 2009
Atlanta-based The Home Depot last week announced it is exiting its Expo business. The company is also taking steps to streamline its support functions. These decisions will impact 7,000 associates, or approximately two percent of its total workforce. The company also reaffirmed its previous guidance on earnings for the 2008 fiscal year, excluding the charge associated with the newly announced actions and the store rationalization charge recognized earlier in the year.

Atlanta-based The Home Depot last week announced it is exiting its Expo business. The company is also taking steps to streamline its support functions. These decisions will impact 7,000 associates, or approximately two percent of its total workforce. The company also reaffirmed its previous guidance on earnings for the 2008 fiscal year, excluding the charge associated with the newly announced actions and the store rationalization charge recognized earlier in the year.

The Expo business has not performed well financially and is not expected to anytime soon. Even during the recent housing boom, it was not a strong business, the company said. It has weakened significantly as the demand for big-ticket design and decor projects has declined in the current economic environment. Continuing this business would divert focus and resources from the company's core "orange box" stores. Therefore, over the next two months, the company will close 34 Expo Design Center stores, five YardBirds stores, two Design Center stores and a bath remodeling business known as HD Bath, with seven locations. These steps will impact approximately 5,000 employees in those locations, their support functions and their distribution centers.

"Exiting our Expo business is a difficult decision, particularly given the hard work and dedication of our associates in that business and the support of our loyal customers," said Frank Blake, chairman and CEO. "At the same time, it is a necessary decision that will strengthen our core Home Depot business."

Jim Summers, director of tool rental for Home Depot Rentals, told RER the company is still fully committed to the tool rental business. “We did do some restructuring to streamline the tool rental and pro operations here in the store support center,” Summers said. “We have not made any changes or cuts to our customer-facing associates.”

The company also announced that it is restructuring support functions to better align its cost structure with the current economic environment. This includes continuing its shift to a region- and district-based support model in various field functions and reducing headcount in administrative functions in the company's store support centers. These support reductions will impact about 2,000 associates and will result in a 10-percent reduction in the company's officer ranks. They will not impact any customer-facing positions in Home Depot stores, the company said.

Home Depot is also initiating a salary freeze among all officers. But, it will continue to offer merit increases to non-officer associates, as well as earned bonuses and the company's existing 401k matching contribution for all associates, including officers. The company will offer severance, earned bonuses and other benefits to all impacted associates.

"We're very fortunate that the soundness of our company lets us live our value of taking care of our people, even in this time of unprecedented economic hardship," Blake said. "These changes will make us a stronger company and will allow us to continue to grow associate employment over the long term to benefit our customers."

The company anticipates taking a total pre-tax charge due to these actions of approximately $532 million, of which about $390 million will be recognized in the fourth quarter. The remaining $142 million will be recognized in 2009 and beyond. The charge consists primarily of fixed asset write-offs, lease reserves on closed stores, severance and store closing costs. The cash component related to severance and store closing costs is projected to be approximately $153 million over the next 12 months, which the company expects to offset by cash received for liquidated inventory.

These actions should benefit fiscal 2009 earnings before interest and tax by about $305 million, Home Depot officials said. The benefit to earnings is primarily a result of payroll savings and operational improvements from the business exit.

The company announced that it will take two charges in the fourth quarter related to its sale of HD Supply in 2007 and its ongoing equity interest in that business. First, it will record a charge of approximately $55 million, net of tax, to be reflected in discontinued operations primarily related to the working capital dispute related to the sale of the business. The cash component of the HD Supply charge is $22 million. Second, it will record a pre-tax charge of $163 million that will be reflected in other expense for a write-down of the company's investment in HD Supply.

The Home Depot confirmed that it expects fiscal 2008 sales and earnings per share from continuing operations to decline by 8 percent and 24 percent respectively before the charge associated with last week's announcement and the store rationalization charge recognized earlier in the year.

Looking forward, the company anticipates continued weakness in sales related to the broader economic downturn, but will continue to invest in customer service in its core Home Depot stores, while optimizing its capital allocation. It plans to reduce capital expenditures to about $1 billion in fiscal 2009 and open 12 stores. Fiscal 2009 sales and earnings per share guidance will be provided during the company's fourth quarter earnings call on Feb. 24.

The Home Depot is the world's largest home improvement specialty retailer, with 2,274 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces, Mexico and China. In fiscal 2007, The Home Depot had sales of $77.3 billion and earnings from continuing operations of $4.2 billion.

Home Depot Rentals is No. 5 on the RER 100.