Fool on the Street: Home Depot's Dry Update

Here at the Fool, we know you've got a life. Between working while the sun shines, and catching Zs when it doesn't, you may find it hard to keep up to speed on Wall Street events -- corporate "investor conferences," for instance.

These meetings ostensibly benefit investors, but the companies behind them rarely transcribe their proceedings and file them with the SEC. As a result, unless you can attend in person, you're often left out in the cold. That's where our "Fool on the Street" series comes in. We listen to the conferences, so you don't have to.

Without further ado ...
Today, we'll recap Home Depot's (NYSE: HD) presentation Sept. 5 at the Goldman Sachs 14th Annual Global Retailing Conference, where new CEO Frank Blake (a GE (NYSE: GE) alum like old CEO Bob Nardelli) and Executive Vice President of Merchandising Craig Menear made the company's case to Wall Street. As presentations go, this was a short one. We'll make it shorter still by focusing on just four key points.

Supply chain
Last time we reviewed one of these events, Home Depot, a Motley Fool Inside Value pick, sent its Senior VP, Supply Chain, Mark Holifield, to speak about product availability -- one of the five areas Blake has marked for improvement under his tenure. Blake made a much briefer reference to this subject last week, but the points he did make are worth noting. Specifically, he argued that as supply-chain improvements come on line, inventory turns will improve such that "we should be able to have more efficient working capital. One improvement in inventory turns is close to a couple of billion dollars cash, so it's an enormous opportunity in improving our inventory terms."

In the short term, of course, improving the supply chain will entail costs. Said Blake: "It is not a steady ramp of improvement on margin. In fact, short term, as you say, it puts some pressure" on margins. To reduce that pressure, Home Depot must strive to ramp up sales. According to Blake, for "every point of negative comp, that's about 20 basis points [lost] on operating margin."

Speaking of sales growth
With merchandising head Menear in tow last week, you could expect the talk to revolve primarily around this one of Blake's five areas targeted for improvement. And while you'd be right, I suspect you'd be a bit disappointed in the details provided. In contrast to Holifield's talk, which was big on specifics and quite detailed on how improving the supply chain would slash costs at Big Orange, Menear's talk was long on industry jargon and glowing generalities, but short on specifics. Searching the transcript for something worth repeating to you, the Home Depot investor, I think the four most relevant points are as follows. Home Depot is grouping its merchandise into four broad categories, which it terms its "focus bay":

• Leadership products, which refers to "those things that if somebody woke you up in the middle of the night and said, 'Home Depot,' what would you think of." In this category, the company notes that it has the No. 1 market share in sales of power tools in the U.S. The company aims to build on that position by partnering with industry leaders -- for example, by doing an "exclusive launch" with Black & Decker's (NYSE: BDK) "new VPX line, which goes after the Gen X first-time tool users."
• Next up are commodity products that are essential to a project, be it do-it-yourself or hire-a-contractor. Here, Home Depot places "things like fertilizer or lumber or drywall."
• Counterintuitively, "core" products were mentioned in third place. Here we find "fundamental basic categories that are necessary to complete a project." Think "bath hardware" from American Standard (NYSE: ASD) or Kohler, or cabinets from American Woodmark (Nasdaq: AMWD) or Masco (NYSE: MAS).
• Finally, Home Depot will be looking to promote merchandise in "emerging businesses," with examples being given as "outdoor living" and "patios."

Wish I could tell you more about Home Depot's merchandise plans, but for now, that's what we've got. At least it gives us a glossary of terms we can expect to pop up in company updates on its progress.

CEO 's view of housing
In contrast to the vagueness on merchandising, when asked by one analyst to lend us the benefit of his perspective on the housing market, Blake offered up some really useful information. For example, the CEO does not expect to "see some bottoming and some beginning of the recovery" in the U.S. housing market this year. Rather, "our assessment is that much of '08 will continue to face into headwinds."

What does this mean for Home Depot customers? Blake suggests that investors monitor "housing permitting activity" (meaning builders applying for permits to build), especially in key markets like Florida and California. Says Blake, "if you just compare that permitting activity, year over year, you'd see there's a pretty good correlation" between where housing markets are weak, and where Home Depot's own sales are weak -- and strength to strength, as well. Blake highlighted "Texas ... some of the Midwest, the Ohio Valley area, the Southeastern part of the United States, North Carolina, South Carolina, parts of Virginia" as regions where permitting activity showed "strength," and where Home Depot's own business "held up pretty well."

Buyback
Speaking of housing, Blake made one comment -- almost buried in the broader presentation -- that may give current Home Depot investors some cause for worry. Questioned on the subject of turbulence in the credit markets, Blake responded that "our board has reaffirmed that our target is at $22.5 billion in terms of our share buyback. We have taken almost half of that with the tender offer ..." As for when Home Depot would buy back the rest of the shares it's authorized to repurchase, he opined that "it's not only the choppiness in the credit market, but it's also what's going on in our own business and our views on the housing market and the recovery of the housing market. ... it's certainly fair to say that from my perspective, it's going to be a longer path [toward completing the buyback] than certainly I would have initially envisioned."

As I read this, Blake is saying that if housing keeps falling, so might Home Depot's stock, permitting better buyback prices down the road. On the one hand, that argues in the CEO's favor -- he's not planning to use the buybacks to support the stock price, but to use any weakness in the stock price to get better deals on his buybacks. On the other hand, a CEO suggesting weakness in his firm's stock price isn't particularly good news for current investors.

Keep up to date on Home Depot's turnaround with:

• Another Failure for Home Depot
• Fool on Call: Building a Better Home Depot
• This Just In: Upgrades and Downgrades
• Home Depot Has Work to Do