The Atlanta-based home improvement giant reiterated its intention to open 55 new stores worldwide, including 36 in the US, through the current fiscal year while growing its square footage by approximately 1.5% annually, starting in fiscal 2009. At the same time, the company will record a $400-million charge related to capitalized development costs associated with canceled future openings, and reduce aggregate new store capital spending by $1 billion over the next three years.
"We will invest in our core retail business, in this case our existing stores, which drive our most profitable sales," Frank Blake, chairman and CEO, stated in a release. He noted that the company's total capital spending for the current fiscal year is projected to be approximately $2.3 billion, less than two-thirds of last year's amount.
Wall Street analysts say the moves announced Thursday are the correct course of action given the continuing national housing slump, a key contributor to current economic turmoil. They point to Commerce Department estimates that investment in existing residential real estate was off by nearly 27% through this year's first quarter.
"It is prudent that the company is scaling back its pipeline," Laura Champine, who covers Home Depot for Morgan Keegan & Co., tells GlobeSt.com. "We're unlikely to see the same industry spike we saw earlier in the decade."
Champine adds that she was a bit surprised at the number of store closings Home Depot disclosed, thinking it would be only five. She says the company's leading position won't be jeopardized by the scaledown, despite aggressive expansion moves by Mooresville, NC-based Lowe's Companies Inc., a distant second in the home-improvement category.
Home Depot's 15 announced store closings, affecting roughly 1,300 associates nationwide, represent less than 1% of its existing store portfolio and were deemed to be underperforming locations. The company will record a charge of $186 million related to the closings, including inventory markdowns of $11 million and employee severance of $8 million.
"We put our real estate projects through a tight capital efficiency model," Blake said in announcing the closings. "This model prioritizes locations that make the most efficient use of capital, reduce cannibalization and drive higher returns. By building fewer stores, in the best locations, and making sure our existing stores are profitable, our company will be in a much stronger competitive position."
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