Fools keeping tabs on home improvement behemoth and Motley Fool Inside Value recommendation Home Depot (NYSE:HD) know it's a company in need of at least a few repairs. First-quarter results scheduled for release tomorrow morning will offer insight into how fiscal 2007 is shaping up. I'm not expecting very good news, given the company-specific issues and difficult industry conditions, but any further short-term mishaps could improve an already interesting risk/reward scenario in the stock.

What analysts say:

  • Buy, sell, or waffle? Twenty-three analysts follow Home Depot. Twelve are bullish, one is a bear, and 10 sit on the fence with a hold rating.
  • Revenue. On average, they expect to see $21.94 billion in sales, or 2.2% growth.
  • Earnings. Projected earnings are $0.59 per share, or a fall of nearly 16% from last year's $0.70.

What management says:
Home Depot proclaimed 2007 "a year of accelerated investment in [the] retail business" during its investor and analyst conference at the end of February, hoping to end a period of store underinvestment during former CEO Bob Nardelli's run at the top. However, subprime woes are hitting the industry, and management expects "2007 to be a challenging year as the housing environment remains soft." The company is also still considering selling Home Depot Supply, the non-retail arm that primarily serves professional builders and contractors.   

What management does:
Profitability has suffered over the past six quarters as the trifecta of weak same-store sales, tough industry conditions, and inherently low margins at Home Depot Supply all hit the bottom line. Additionally, archrival Lowe's (NYSE:LOW) has been picking up market share with better customer service and more expansion opportunities into Home Depot's core metropolitan markets.

Margin

10/05

1/06

4/06

7/06

10/06

1/07

Gross

33.6%

33.9%

33.7%

32.2%

32.6%

32.8%

Operating

11.9%

11.5%

11.4%

12.3%

10.7%

9.8%

Net

7.4%

6.6%

6.9%

7.2%

6.5%

4.6%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Tomorrow's results are probably too soon to see any of new CEO Francis Blake's moves take hold. However, we already know that 2007 will be tough, given the information provided from last year's annual report and February's analyst conference. The retail outlook is bleak, as the company is calling for negative mid-single-digit comps in retail and flat-to-negative overall growth, even though square footage will grow close to 5% and Home Depot will add 115 new stores.

Home Depot is also supposedly considering selling the supply business, but I'm not optimistic, given the challenging housing market and the fact that management expects total supply sales growth of 17% -- without further acquisitions. Overall, it appears that Home Depot will be dependent on Nardelli's growth strategy until it can right retail sales trends, which will "consume" as much as half of the $30 billion in cash Home Depot expects to generate between 2007 and 2010.

Fortunately, Home Depot sports a 2.3% dividend yield and is trading at a reasonable 13.05 times projected earnings for the coming year. This is a more favorable yield and multiple than can currently be found at Lowe's and other big-box giants such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Costco (NASDAQ:COST). Clearly, there are many factors to weigh when deciding to invest in the largest retailers out there, but given Home Depot's valuation and co-dominance of the still-expending home improvement retail industry, it could merit further tire-kicking.

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Fool contributor Ryan Fuhrmann is long shares of Home Depot and Lowe's but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.