Home on the Range
Mike Trigg (TMF Tonto)
NASCAR's Tony Stewart won the Bud Shootout at Daytona International Speedway in dramatic fashion last Sunday, driving his Home Depot-sponsored Pontiac past Dale Earnhardt and Jeff Gordon in the closing minutes of the race. One can't help but think the recent success of Stewart and Home Depot might find its way to Fool HQ, propelling the Bull to win this Duel.
After reading Rick's initial argument, there's little we disagree on. I'd concede that Home Depot's storewide sale was shocking, the Q4 warning was a disappointment, and that he got trounced in the voting of last year's Duel. But we're not here to talk about past performance -- right, Rick? In fact, no one understands the importance of future performance better than Home Depot's management. That's why my argument focused on the company's growth initiatives.
I stated earlier that high on Home Depot's list is international expansion. Rick paints international expansion as a risky endeavor, "where a bit of golden-orange Americana might not translate well to the native country." Home Depot is well aware of this and has stated it would pursue an acquisition strategy in markets where companies with comparable formats can be found.
Home Depot's efforts in the appliance market represent another effort to diversify its top line. I'd hardly say the demise of Circuit City foreshadows the same for Home Depot. In fact, the company expects to post $2 billion in sales from this segment in 2003.
As for the expansion plans of Lowe's, it has no other choice than to expand into larger markets. Still, that will take a great deal of time, and markets like Boston are big enough to support both companies.
There's business and financial model advantages of the EXPO Design Centers that I failed to mention earlier. The concept of the store dictates that sales will be higher with fewer inventories required. An EXPO is designed for big-ticket sales because it caters to the baby boomer generation and below. Those people are at the peak of their housing-related spending years. As for inventories, most orders are customized or special, which allows the company to carry fewer inventories.
The home improvement business isn't going away. True, difficult economic conditions have hurt the company, but Home Depot will withstand the tough times better than the competition. The top dog in any industry, for example, typically holds more pricing power than its competitors. Plus, struggling companies will exit certain markets and focus on profitability, leaving more market share to be gained. Meanwhile, Home Depot will have diversified its revenue stream, making it a stronger company than before.
Mike Trigg spends his days offering readers what Gordon Gekko called "the most valuable commodity": information. Mike's holdings can be viewed in his personal profile. The Motley Fool is investors writing for investors.
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