Home Depot Gains By Turning Recession into Opportunity

Home Depot (HD) is gaining in the weak recovery, and it's fair to say that its ability to use the recession to boost efficiency is helping it muddle through more successfully than some other retail giants, including Walmart (WMT).

Frank Blake, Home Depot's CEO, has insisted that an economic downturn is a terrible thing to waste. And Home Depot has had a lot of downturn to use. It was hit early because the housing sector, which it serves on the "pro" side of its business, began to slide toward recession in 2006. At that point the company recognized that adding new stores -- previously a top priority -- no longer made sense. So Home Depot began to focus on running its business more effectively, and not just by making temporary adjustments.

In the company's second quarter conference call, Blake pointed out rapid deployment centers now serve 80 percent of the company. These centers were critical to the company's plan for managing distribution and inventory more efficiently, as Home Depot had previously just used its stores as warehouses. That system was already starting to collapse, particularly at smaller stores in more urban areas, which just didn't have the space to sock away products until needed. One big consequence: small stores tended to run out of high demand goods while holding inventories of slower moving products in what might otherwise have been sales space.

The company plans to have 100 percent of its stores hooked into the rapid deployment system by years end, which should boost sales, due to fewer out of stocks and create a more cost efficient product flow to stores, reducing costs.

Additionally, the company has built up initiatives to improve the analytics it uses to evaluate merchandise and display. By more effectively analyzing the kind and amount of product that goes into stores, the company has been able to cut down on inventory close outs and related discounts.

That's critical for Home Depot, as a tremendous amount of its business is seasonal. The lawn and garden category, for instance, accounts for a big chunk of any given store; in summer it will feature patio sets and outdoor décor, while in winter it shifts to snow blowers. Such expensive merchandise can cause serious losses if it has to be discounted out of the store when seasons turn. Blake said the use of analytical tools already reduced seasonal markdowns in the second quarter.

Home Depot has positioned itself to make good money off modest improvements by assuming economic conditions would stay soft in 2010. True, its business isn't exactly going gangbusters -- comparable store sales, those at locations open for a year, only gained only a bit better than one and a half percent. But in addition to cost-cutting (including some layoffs), the company made fundamental changes to its business that will continue paying off when conditions approve.

For now, however, Home Depot's caution as regards conditions seems fortunate. Like competitor Lowe's (LOW), Home Depot still sees its pro business lagging more than anticipated, and it, too, said recovery in the housing market may take longer than it initially thought.