The Home Depot, which has been a cash machine throughout most of its 30-year history, ventured into uncharted waters in the last three months of its fiscal year, when it lost $54 million, compared to a net earnings gain of $671 million in the same period a year ago. That may have been the first loss in net income the company has reported since going public in 1981.

Home Depot's revenue in the quarter dropped 17.3 percent to $14.607 billion, with its comp-store sales off by 13%.

Its quarterly loss is the result of several factors, not the least of which being a depressed housing market. Its business in Canada also fell apart in the second half of the year. But other factors "distorted" its financial performance, according to CFO Carol Tome. For one thing, the quarter had one fewer reporting week than in 2007.

Second, during the fourth quarter the company announced that it was closing 34 Expo Design Centers, five Yardbirds outlets, and two design centers. To cover the costs of those closings, it took a $387 million pretax charge. There was residual impact in the quarter from a $564 million charge that Depot took earlier this year to cover the closing of 15 warehouse home centers and taking another 50 locations out of its future new-store opening pipeline.

In the fourth quarter, The Home Depot also wrote down $163 million, or 50%, of its 12.5% stake in HD Supply, a business that Depot sold off in 2007. Settling a dispute related to that sale resulted in a $52 million loss from discontinued operations.

Excluding the writedown and charges, The Home Depot's quarterly earnings would have been positive, albeit off by 52.5% from the same quarter a year ago.

For fiscal 2008, The Home Depot generated $71.288 billion, or 7.8% less than in fiscal 2007, with comp-store sales off by 8.7%. The company's earnings for the year were down 48.6% to $2.26 billion. For the year, its discontinued operations contributed $927 million in revenue, but also recorded an operating loss of $43 million.

During fiscal 2008, the company's stores transacted 4.8% fewer sales than in fiscal 2007, and the average ticket of those sales fell by 3.3% to $55.61, although some of that decline might be attributable to a new pricing strategy that Depot put in place last year.

Frank Blake, the retailer's chairman and CEO, noted that despite his company's dismal financial performance, it still made strides to right itself last year. It reduced its inventory levels by more than $1 billion, to $10.7 billion, and got out of non-core businesses (although it could be argued that The Home Depot held on to its Expo stores way past their expiration dates).

That being said, Blake expects sales in 2009 to be off by another 9%, comp-store sales to be negative, and profitability to be down another 7%. "2009 is an even more uncertain planning horizon," he said during a teleconference this morning. Last month, the company announced it would impose a salary freeze for all of its officers this year. It also earmarked $1 billion for capital expenditures this year (down from $1.85 billion in 2008 and $3.39 billion in 2007), and expects to increase its store count by only 12 units, from 2,233 units in its continuing operations in North America and China at the end of last year. (Depot generates about 10% of its annual revenue outside of the U.S., said Tome.)

During the teleconference, Blake and other officers identified areas where The Home Depot has to do better this year:

•It needs to improve its supply chain. In January, the company opened its fifth regional distribution center, in Allentown, Pa., and by the end of 2009 its RDCs will handle product for more than 1,000 of its stores. By 2010, all of its stores will be served by RDCs;

•It needs to improve its merchandising tools. While every department reported negative comp-store sales growth last year, the company managed to hold the line on its gross margins, which Craig Menear, the company's executive vice president of merchandising, attributes in part to Depot's "portfolio" strategy, where it is trying to capture project sales. (The company has some work to do here, as customer transactions over $500 fell by double-digit percentages last year.) The Home Depot has also returned to what was once its calling card: everyday low prices as opposed to promotional pricing. And while the company scaled back its inventory, its in-stock position in 2008 was the strongest in five years, said Blake;

•It needs to continue to improve its customer service and in-store processes. Blake said that The Home Depot invested $250 million last year in increasing manpower hours in its stores and improving its associates' efficiency. It also installed a new computer system into its Canadian operations and will evaluate that system this year to see whether to expand it to its American operations eventually.

John Caulfield is a senior editor at BUILDER magazine.

 

Learn more about markets featured in this article: Atlanta, GA, Allentown, PA.