This bear argument will probably seem a bit strange to anyone who's looked at my Fool profile. You see, Motley Fool Inside Value recommendation Home Depot (NYSE:HD) is among my holdings. I've been long on the stock for more than a year now. But that doesn't mean I'm an unabashed admirer.
As I see it, three key problems face Home Depot and its shareholders:
- The housing bust and the economy.
- Competition and scale.
- Jerks in the executive suite.
They make bubbles, don't they?
Let's take the housing bust first. As I've written many times, I think we're in the midst of a significant housing bubble, one that's only just begun to pop. I used to believe that a cooling housing market might not kill Home Depot's top line, since consumers priced out of new digs from Toll Brothers (NYSE:TOL) or Lennar (NYSE:LEN) could content themselves with upgrading what they've got. Unfortunately, reality suggests that as home spending drops, the 90% or more of Home Depot's revenue tied to the housing market is put at greater risk.
To fight this cyclicality, Home Depot has moved aggressively into distribution for the construction biz -- most notably by purchasing Hughes and Whitecap -- to put a greater portion of the firm's revenues in what is ostensibly a more stable market, supplying commercial building. Unfortunately, I believe the upcoming housing bubble will hurt the entire economy, leading to less construction everywhere. I don't think HD Supply will make up for the shortfall.
Giving customers the pipe
Customer-service conventional wisdom says that Home Depot's service is bad, while the help at Lowe's (NYSE:LOW) is better. In my experience, they're both pretty awful. I've written before about how the parking lot at my local Home Depot is impossible to negotiate. Once inside, I'm faced with a dirty, unorganized store, rife with visible theft (pilfered bubble packs, etc.) and staffed with unhelpful, profane associates. Unfortunately, nothing has changed in my neighborhood.
I'd like to think that my experience is an isolated situation, but Home Depot's recently announced $350 million initiative to improve stores and service is an overt admission that things need improvement. Will it be enough? I doubt it. Dividing the $170 million toward new help by 2,041 stores yields just more than $83,000 per store. That's enough for, what, four new staff members? (And only if you're really giving them crummy pay.) Taking the remainder, you've got less than $90,000 per store for upgrades. Yeah, doesn't sound like much to me, either.
In the meantime, we've got Home Depot managers, including CEO Robert Nardelli, out bragging to the press and investors that the company is a big player in the pipe biz. Our core customers are flocking to rivals, but hey, "We've got pipe!"
I think that shows, better than I could, that Home Depot's customer-service and rebuilding initiatives are mere lip service, designed to assuage angry shareholders rather than address the real problems. Looks to me like Home Depot believes retail can't provide much growth, and that's a real problem.
Nardelli's dolce vita
Speaking of real problems, let's talk about big Bob Nardelli, Home Depot's head offender. This guy refused to take shareholder questions at the latest annual meeting, apparently believing that his gazillion-dollar pay package really does make him different from the rest of us little people -- even if we own the company.
Nardelli's subsequent backtracking on annual-meeting questions and same-store-sales reporting was welcome. Though too much attention is paid to the same-store-sales metric, it's never a good thing to give the store's owners less information. A more telling issue, to me, is that Nardelli caved only after a massive PR nightmare. I think the stock would do better if the board gave him the heave-ho. Nardelli's heavy-handed bean-countery may have juiced earnings and cash flow over the past few years, but I think he's squeezed too hard, as evidenced by the terrible condition of the company's stores and customer service.
I don't think a guy who has hauled in some $250 million over the past five years has any idea what it's like to walk into a Home Depot in need of help. Until it pays more attention to bringing shoppers back, I don't think the company can buy its way to healthy growth.
With economic pressures mounting, growth stagnating, and management that's accountable to no one, I think there are plenty of good reasons to stay out of Home Depot.
Think you're done with the Duel? You're not! Go back and read the other three arguments, then vote for a winner .
Find more fixer-upper stock opportunities with a free 30-day trial subscription to Motley Fool Inside Value.
At the time of publication, Seth Jayson had shares of Home Depot but no positions in any other company mentioned. View his stock holdings and Fool profile here. See what he's Digging these days. Fool rules are here.
