Home Depot on a roll
The company notched an impressive gain Tuesday after telling analysts it would target DIY customers.
This stock is on a roll, rising nearly 15% in the past three months.
You'd think the company wouldn't be faring all that well. The housing market is dismal, with home prices continuing to drop. Homeowners are cash-strapped, with little money budgeted for major renovation projects.
So why all the investor love Tuesday? Perhaps it was because Home Depot gave a peek into its newest strategy at a breakfast it held with analysts, Barron's reports.
Home Depot is shifting its model to cater to do-it-yourself customers, Darren Bassman, an analyst with Janney Capital Markets, wrote in a note obtained by Barron's. The company plans to change its product mix in stores to focus on smaller projects.
"Clearly, the company's goal to achieve 10% operating margin is based on this scenario, with potential upside given any macro tailwind," Bassman adds. He thinks Home Depot could grow earnings by at least 15% next year, noting the company's ability to repurchase about 8% of outstanding shares with more than $4.2 billion in free cash flow.
It's a smart strategy. Absent any real progress in the housing market, Home Depot needs to go where the money is. And right now, the money is in small projects that homeowners can accomplish themselves over one or two weekends without breaking their bank accounts.
DIY is the future, at least in the near term.
I saw evidence of this at rival Lowe's (LOW) recently. The chain had big displays featuring a DIY Network tile backsplash kit, among other projects.
Home Depot also got some nice news from Fitch, which lifted the company's credit rating based on strong operations, good cash flow and positive same-store sales, according to Wall St. Cheat Sheet.
The company reported an exceptionally strong third quarter, buoyed by consumer spending before and after Hurricane Irene hit the East Coast. Profit rose 12% to $934 million, or 60 cents a share -- one penny higher than analysts had expected. Sales rose 4% to $17.3 billion, higher than the $17.1 billion expected.
Earlier this month, the company raised its quarterly dividend by 16% to 29 cents a share. A dividend yield of 3.1% is nothing to sneeze at.
isn't this what their basic model always has been??????
Home Depot is shifting its model to cater to do-it-yourself customers
Finally, HD is paying attention to DIY'ers on simply projects that can be completed with basic help.
This is a step in the right direction because it can offer homeowners, small business owners the ability to reduce the cost of their budgets. HD adding the DIY to its product mix, is one great idea at a great time. I can't wait for the in-house training or the You Tube videos which I think Lowe's might have an edge. Take a look at the process of installing tiles on You Tube.
Nice idea in theory. But how HD is really going to cash-in on this idea is when all these first-time DIY'ers projects turn-out looking nasty and fall-apart after 1-month, and they realize how much time, focus, energy, skill and extra-tools & extra-materials are required to do the job right.
Then, when these first-time DIY'ers need the project done over and DONE RIGHT THEY CAN CALL ME. That way, HD gets all the materials purchased 2x for the same-project. Cha-ching for HD.
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John Stumpf acknowledges that growth has been slow, but he says he's still optimistic.
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