Home Depot to Spend $2.2B on Improvements

Atlanta, GA, March 1, 2007--Home Depot said it will pump $2.2 billion into improving its business this year even as it expects lower earnings and slim sales growth, partly because of a continued slump in the housing sector.

The company said that for fiscal 2007 it expects sales growth in the range of flat to an increase of 2 percent, a decline in sales at stores open at least a year in the middle single-digit percentages and an earnings per share decline of 4 percent to 9 percent.

Including the effect of a 53rd week in its fiscal year, consolidated sales are expected to increase by 1 percent to 2 percent, and earnings per share are expected to decline by 3 percent to 8 percent, Home Depot said.

The earnings guidance does not include the impact of any share repurchase Home Depot might do in 2007, chief financial officer Carol Tome said.

Chief executive Frank Blake said the company does not expect residential construction and the housing market to improve until late in the second half of 2007 or early 2008.

Blake told investors at Wednesday's conference that like last year, "2007 also will be a difficult year."

But he said it will be a year of focus on Home Depot's priorities and a year with "hopefully less noise." The "noise" was apparently a reference to the investor furor over former Chief Executive Bob Nardelli's hefty compensation in light of the company's lagging stock price. Nardelli resigned in early January after six years at the helm of the company. He left with a severance package valued at $210 million.

"We continue to see short-term challenges in the market," Blake said. "But long-term we think the home improvement market is a terrific market."

To improve its business, Home Depot said it will invest $2.2 billion this fiscal year in key priorities. The investment includes $1.6 billion in capital spending and $600 million in expense.

Home Depot said it will open 115 new stores this year. Between now and 2010, Home Depot will open 300 to 400 new stores, Tome said.

Goals this year include generating excitement about its products, increasing product availability, improving the shopping environment and cultivating the professional customer, the company said.

"We have a lot of work to do to achieve this vision, but it is a reasonable one," Blake said.

In a round-table discussion with reporters Wednesday afternoon, Blake acknowledged that a lot of Home Depot's initiatives are similar to what the company has done in the past. He insisted the difference this time will be the company's focus on the effort and the resources it devotes to it.

"We're saying we've got to invest more to get back (market) share," Blake said. "It's not, 'Did we invest enough in the past?' It's what we've got to do to get back to where we want to be in the future."

Blake also touched on Home Depot's decision to consider selling its wholesale distribution arm, Home Depot Supply.

"I look at the company as one integrated Home Depot," Blake said, referring to the rationale behind possibly shedding HD Supply. "To me, something simpler is easier."

He said he and Nardelli had some "different" views on strategy. But he could not say that that was the reason Nardelli left the company.

The changes Home Depot is making also mean a change in philosophy for Home Depot.

"We cannot be all things to all people," Craig Menear, Home Depot's senior vice president of merchandising, said at the investor conference.

Home Depot said it will recruit master trade specialists, simplify its staffing model, use more technology to aid customer service and redesign employee compensation and reward plans.

It also will invest in new merchandise and review its pricing strategies. Home Depot added that it will spend money on customer loyalty programs, direct shipping programs, credit programs and other specialty sales initiatives.

Polished floors and upgraded lighting are among the in-store improvements that will be made. Home Depot also is launching a new advertising campaign focusing on a "heroes" theme.

Paul Raines, Home Depot's southern division president, said the company realizes that customers expect more from Home Depot.

"We know we have to increase the number of associates that customers see in our stores," Raines said.

Beyond 2007, the company believes that investments made in its retail business will allow sales in the retail business to return to above market growth rates.

Home Depot said that coupled with its commitment to share repurchases, the company anticipates earnings per share growth of more than 10 percent annually in future years.

It projected that beyond 2007 it will see an annual sales growth of roughly 5 percent, annual earnings growth greater than 5 percent and annual earnings per share growth of 10 percent or more.

Home Depot operates 2,163 stores in the United States, Canada, Mexico and China.

Asked about his future, Blake told reporters he has no intention of leaving his post anytime soon.

"I like to see myself as a long-term solution," Blake said during the round-table. "I haven't been thinking of myself as short-term. This is a great company. It's a great honor to be leading the company. I hope to be doing it for a while."