3 Reasons Home Depot's Stock Could Fall

The home-improvement retailer is on a hot streak, but a few things could bring the good times to an end.

Aug 28, 2014 at 3:30PM

Hd Worker
Source: Home Depot.

Home-improvement retailer Home Depot (NYSE:HD) has made a huge impression on the stock market in recent years, with explosive share price gains having contributed greatly to the record run that sent the S&P 500 above the 2,000 mark for the first time earlier this week. Yet even though Home Depot earnings have looked healthy and prospects appear strong for the company's future, there are still some dangers that the retailer will have to overcome to keep moving forward. Let's look at three things that could bring Home Depot stock's bull run to an end.

1. CEO Frank Blake's imminent departure could cause some transition issues for shareholders.

Hd Blake

Outgoing CEO Frank Blake. Source: Home Depot.

Current CEO Frank Blake assumed the head role at Home Depot in 2007, following the controversial realm of former CEO Bob Nardelli. Whether or not it's justified, Nardelli is best known for two things: his controversial moves to cut back on experienced staff in favor of lower-cost labor, and his $200 million-plus severance package following his departure from the home-improvement company in early 2007. By contrast, Blake navigated Home Depot through the aftermath of the housing bust and the financial crisis, and he has presided over a much more favorable period in terms of the stock's performance.

Hd Menear

Incoming CEO Craig Menear. Source: Home Depot.

But Blake just announced that he will give up the CEO role as of Nov. 1, giving way to current U.S. retail president Craig Menear. With 34 years of experience in retail, Menear is a perfectly capable executive, and no one seems disappointed with the company's selection of Menear as Blake's successor. But the uncertainty involved with any CEO succession plan will put Menear under pressure in his first few quarters, and after such a successful time with Blake, Home Depot will have to keep firing on all cylinders to satisfy the high expectations of its investors.

2. Home Depot won't necessarily be able to repeat its past success in weathering tough macroeconomic environments.

Home Depot did an excellent job during 2009 and 2010 in keeping its business moving forward despite a very sluggish recovery that had very little positive impact on the housing market. It took years for housing prices to hit bottom and start rising again, but Home Depot shares anticipated the gain in the housing market. In fact, Home Depot did a better job than rival Lowe's (NYSE:LOW) in finding ways to keep growing even as the housing market struggled to recover. Since then, housing has started climbing again, bolstering results throughout the home-improvement retail industry.

Hd Values

Source: Home Depot.

Despite the unexpected continuation of low interest rates, most economists believe that housing growth will eventually slow and that interest rates will have to move higher. Home Depot has had plenty of time to anticipate those moves and prepare with strategic initiatives it can use to make the transition to a more challenging economy. Yet just because it was successful with such initiatives in the past doesn't mean that they'll work again -- especially as Lowe's and other rivals have learned from their own past mistakes. Any failure could disappoint Home Depot shareholders and send the stock floundering at least temporarily.

3. Home Depot could have trouble expanding to international markets.

One of the biggest growth opportunities Home Depot has is to expand its big-box retail concept to other countries. Yet the home-improvement retailer has a mixed track record of success in adapting its business model to foreign markets.

In particular, Home Depot had a terrible experience trying to enter the Chinese market. In 2006, it bought a dozen stores from a locally based company and set out to duplicate the do-it-yourself experience in the emerging-market nation. But by 2012, Home Depot had decided to close all of its remaining stores in China, costing the company $160 million in the form of an after-tax charge. Home Depot conceded that the do-it-yourself concept didn't really take hold in China, where consumers were more inclined to pay professionals to have work done for them rather than tackling projects on their own.

Hd Values
Source: Home Depot.

Of course, some foreign markets will sport large numbers of enterprising customers who do their own work, and Home Depot should thrive in those areas. But the company should also be able to capitalize on its worldwide brand awareness by adapting its model to fit local culture and deliver what customers want.

With Home Depot firing on all cylinders, betting against the stock has been a bad move lately. Yet with these challenges still ahead of it, Home Depot could easily see its shares give up some ground even if its long-term strategy appears sound.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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