Home-improvement giant Home Depot (HD 1.42%) has had an incredible 2015, with solid gains coming from the continued strong performance of the housing industry. Yet despite having rewarded shareholders during the year, Home Depot has still had to deal with its share of bad news.
Let's take a closer look at some of the worst headlines Home Depot had to endure during 2015.
Data-breach fallout continues
In 2014, Home Depot suffered a huge data breach that put as many as 56 million cards at risk. That made it the largest data breach in history, easily topping the 40 million cards that a similar breach at Target (TGT -0.81%) had caused. Even worse, given that the Target breach had happened in 2013, Home Depot arguably should have known it needed to take steps to avoid the same fate Target suffered.
Those who had hoped the controversy would blow over have been disappointed during 2015, as Home Depot continues to deal with the aftermath. A group of 50 banks and more than a dozen credit-union associations comprises a potential class for a class action lawsuit against Home Depot related to the breach, in which the financial institutions are looking to recover some of their costs from the breach. The parties are engaged in preliminary legal battles over communications with absent class members, but settlements between Home Depot and affected banks, credit unions, and financial services companies are likely to be necessary in order for the home-improvement retailer to put the episode behind it once and for all. Home Depot has been in talks with major payment network companies and has put together some tentative settlement terms the retailer hopes will put the legal proceedings related to the breach to rest once and for all.
Moreover, financial costs continue to escalate. During the third quarter, Home Depot reported $20 million in expenses related to the breach. That brought the total that Home Depot has spent on the breach to more than a quarter billion dollars, although insurance has covered about $100 million of those costs.
In terms of reputation, Home Depot has done a good job of managing the damage with customers, who increasingly see data breaches as a cost of doing business. Nevertheless, Home Depot needs to keep working hard to get the breach behind it and move forward.
Industry controversies over flooring products
During the spring, flooring specialist Lumber Liquidators (LL 0.42%) found itself in the middle of a controversy, as the company faced allegations that its flooring had high levels of carcinogenic formaldehydes as well as dangerous levels of phthalates. The episode knocked Lumber Liquidators for a loop and called into question flooring sold at Home Depot and other home improvement specialists.
In its typical fashion, Home Depot was able to turn the controversy into a strategic win. The retailer won praise from the environmental group that had released the phthalate study, as Home Depot will require its suppliers to exclude orthophthalates in vinyl flooring by the end of the year. With Lumber Liquidators and other rivals having a large amount of exposure to the chemicals, Home Depot could well end up seeing a net positive from the episode. Nevertheless, consumers will need Home Depot to educate them in order to reassure nervous customers that its products are safe.
A strong dollar holds back international growth
Finally, Home Depot had to deal with the same currency-related headwinds in 2015 that most multinational companies faced. Home Depot doesn't have a huge amount of international exposure, but its attempts to build up its business in Canada and Mexico have been affected by the strong dollar. In particular, Home Depot said currency impacts cost the company about $1 billion in sales year to date as of the end of its fiscal third quarter.
Home Depot still has high hopes for its international business. Canada posted its 16th straight quarter of positive comparable-store sales in local-currency terms, and the Mexican business saw double-digit percentage growth in comps in peso terms, extending an even longer 12-year streak of positive comps in Mexico. Digital commerce innovation has been a key driver of results outside the U.S., and Home Depot intends to keep developing those capabilities.
Home Depot had a good 2015, and these three negatives didn't do much to hold the company back. Nevertheless, investors should be aware of these issues so they don't catch you by surprise in 2016 or beyond.