Investments abroad: Home Depot leads an international movement
ATLANTA —In spite of a weak first quarter, Home Depot’s annual meeting of shareholders kicked off this year with a lot of cheering—most notably delivered in French and in Spanish, with noise makers, cowbells and clapping.
At the meeting, Home Depot displayed a short video presentation filmed at Home Depot stores in Quebec, Canada; Monterrey, Mexico; Bayamón, Puerto Rico; and New York City. The presentation, reflecting specific areas of growth for Home Depot, also spotlighted a broader trend across the industry.
Other retailers and vendors—both based in the United States and those based overseas—are setting their sights on a diverse international portfolio while the U.S. market struggles with high gas prices, a weak dollar and an uncertain housing market.
“It was very exciting, at least for me, to see the international cheers we had at the start of this program, and realize the international reach of this concept now,” Frank Blake, CEO and chairman, told stock holders. “This business model is one that works very well in other countries…on a proportional basis you’ll see our new store growth increasingly focused in Canada, Mexico and in our international opportunities.”
Currently, Home Depot’s international locations account for 11 percent of the company’s store base—247 stores in all.
“We also continue to see strong performance from our international businesses. Mexico posted positive double-digit (comparable-store sales) for the 14th straight quarter. Canada had positive comps, and we are very pleased that China posted positive double-digit comps,” Blake said at Home Depot’s first-quarter earnings call, held just prior to the annual meeting. The numbers in Mexico particularly are “extraordinary,” Blake said. As for China, “That’s a major opportunity for us going forward. We are very excited about the progress we are seeing there. We think we took exactly the rights trategy—start small, make sure we know exactly what we’re doing there.… and then build out. And as you can see, that’s quite a large market opportunity and one we’re quite excited about.”
The company’s double-digit positive comps in Mexico and China contrast with Home Depot’s overall comparable-store sales decline of 7.3 percent in the first quarter. Earnings were off 66 percent, due to charges from moves to stem growth in the United States. The retailer is not curtailing its expansion plans overseas, however.
Over the years, Home Depot had been rumored to be considering entrance into a variety of those afore-mentioned “international opportunities.” Aside from Canada and Mexico, China has been the only one of those rumors that has since materialized in reality. Back in 2001, various analysts said the retailer was considering entrance into Europe, but it never happened. In 2006, India media reported Home Depot could enter that country through a rumored deal with Reliance Retail, which also has not materialized.
Around the industry, companies are outing their international operations to investors.
At Sherwin-Williams, for example, the only business segment that saw first-quarter revenue grow year-over-year was the paint giant’s Global Group. Paint stores and consumer paints both saw sales falter in the United States in the first three months of the year.
“[Global Group] sales in U.S. dollars increased 14.8 percent to $461.9 million, due primarily to increased volume, selling price increases, favorable currency translation and acquisitions,” said Bob Wells, Sherwin-Williams vp-communications, speaking to investors.
The company’s Paint Stores Group opened 17 stores and closed 23 redundant locations. But in its Global Group, the company opened nine new branches, without closing any.
B&Q, the U.K.-based DIY retailer with a store format similar to Home Depot, has found other pockets of international strength. In its most recently reported financial results, the retailer said sales at Castorama and Brico Depot stores in Poland increased 31.1 percent, while profit in that country increased 41.8 percent to 87 million British pounds ($172.3 million). Sales in Turkey, where B&Q operates a joint venture with a local retail chain, were strong, and sales in Ireland rose 6.8 percent. Sales in Russia, where the retailer has five locations, nearly doubled compared to the previous year. Sales at B&Q China were up 7.9 percent—“The Chinese market remains fundamentally attractive with B&Q’s operations in the major cities continuing to show attractive returns,” read a statement from the company. “B&Q has expanded rapidly over the last three years, adding 42 stores, tripling the store base [in China].”
On the vendor side, Stanley Works showed the importance of international diversification—the tool giant, with its heavy interest in the home improvement and home-building sectors reported an overseas sales increase of 6 percent.
“Of course a lot of that was foreign currency,” CEO John Lundgren told investors. “Europe was up about 7 percent in the consumer tools and storage business, and Bostitch was up even more than that in Europe.”
From the reverse perspective, however, some vendors based overseas are feeling a pinch that was unexpected. Many companies based in Europe, for example, are hurting due to the unfavorable currency translations when shipping to the United States.
Bertazzoni Italia, a manufacturer of high-end cooking products that sells freestanding ranges and oven hoods in Home Depot and Expo Design Center stores, started targeting the American market in the boom years.
“Bertazzoni has been badly hurt by the falling value of the dollar versus the Euro over the last few years,” company CEO Paolo Bertazzoni told HCN. “The dollar has declined almost 40 percent from its value when Bertazzoni started plotting its entry strategy for North America. Our positioning prevents us from simply raising prices to maintain profitability.”
UPDATE – Home Depot, Praktiker rumors resurface
Home Depot CEO Frank Blake shot down rumors that began circulating late last month that the retailer was considering a takeover of Germany’s DIY giant Praktiker AG. When asked by an analyst at the company’s annual analyst meeting on June 5, and later in the by reporters, about whether Home Depot was interested in taking over a European company, Blake said simply, “No.”
Rumors that Home Depot would consider a bid at taking over the German big-box DIY retailer resurfaced May 28 after shares of Praktiker rose 9 percent, ostensibly on the takeover speculation.
Blake said the retailer is focused on expansion opportunities in China and Mexico, but that rumors about an entry into the European market were just that: rumors. He specifically discussed China, and Home Depot’s plans to get its 12 stores in that country into a “profitable model” before a larger rollout some time in the future.
Home Depot has been rumored to be considering European acquisitions on and off for years, as far aback as 2001. Names have included Praktiker and Kingfisher, parent of European chains B&Q, Castorama and Brico Depot.
RONA same-store sales, income down in first quarter
Pointing to poor economic and weather conditions, Boucherville, Quebec, Canada-based hardware retailer RONA announced that same-store sales were down 5.2 percent in the first quarter of 2008, a period that also saw operating income decline 18.2 percent from $40.9 million to $33.4 million.
While RONA’s sales did increase 3.8 percent from $878.5 million to $911.5 million for the quarter, net earnings stood at $1.0 million, or $0.01 per share, compared to $9.0 million, or $0.08 per share, in 2007.
“The results for first quarter 2008 reflect the strong drop in consumer confidence in the country’s economic growth,” said RONA president and CEO Robert Dutton. “Results were also affected by weather conditions that were particularly unfavourable to construction and renovation activity in Ontario and Quebec, where we get nearly 70 percent of our sales.”
Dutton further explained that, because of the seasonality of RONA’s business, only 15 percent of annual sales and 5 percent of earnings are on average generated in the first quarter of the year. “So we have very little room to manoeuvre at the beginning of the year to compensate for these difficult market conditions,” he said.
Still, RONA introduced several initiatives in the quarter under its new PEP (Productivity, Efficiency, Profitability) program, with the following results:
• 130 basis point improvement in gross margin
• More than 10 percent growth in sales of private brand products and installation services
• $83 million, or 9 percent, reduction in inventories on a comparable basis versus first quarter 2007
In addition, RONA stepped up training for employees in sales support in several products and services, including the Project Guide service, RONA by Design, installation services, credit and financing solutions and the new line of RONA ECO products.
“The results of these efforts are very encouraging for the coming quarters. This, combined with the various initiatives to boost sales and stimulate customer loyalty, will allow us to mitigate for the current slowdown in our industry,” Dutton said.
RONA, a distributor and retailer of hardware, home renovation and gardening products, operates a network of more than 680 corporate, franchise and affiliate stores and generates over $6.3 billion in annual retail sales.