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Home Depot to Shut Down Stores

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The sluggish global economy compelled the world’s largest home improvement retailer, The Home Depot Inc. (HD - Free Report) to come up with the decision of closing down its remaining seven big box stores in China. However, the company will operate in the country through its two specialty stores and e-commerce facility. This action is going to affect approximately 850 associates of the company.

Home Depot is anticipating incurring an after-tax charge of about $160 million or 10 cents per share towards store closure expenses, lease termination, impairment of goodwill and other assets. Further, excluding the abovementioned charges, the company continues to expect earnings per share of $2.95 in fiscal 2012. It will continue to employ nearly 170 associates in China for its sourcing offices and specialty stores.

During late 2006, Home Depot made its first ever global presence by acquiring the twelve-store Chinese retail chain – The Home Way. The company lately realized that China is a do-it-for-me market and not a do-it-yourself market. Consequently, Home Depot has now adjusted its business concept accordingly. Home Depot believes that the new store format and e-commerce websites are made according to the Chinese customers’ needs and preferences.

Lately, Home Depot reported a better-than-expected financial result for the second-quarter of fiscal 2012. The company’s earnings for the quarter came in at $1.01 per share, climbing 17.4% from the prior-period earnings of 86 cents, primarily driven by comparable-sales growth and strong operating performance. Moreover, net sales inched up 1.7% to $20,570 million compared with $20,232 million in the prior-year quarter.

Our Recommendation

Home Depot is a leading player in the highly-fragmented home improvement industry. The company has implemented significant changes to its store operations to make these simpler and more customer-friendly. In addition, the company has reinvigorated itself with a shift in focus from new square footage growth to maximization of productivity through its existing store base. We believe these initiatives will induce more customer traffic to its stores while boosting its top line.

Moreover, with the introduction of new warehousing and transportation system, the company has been able to improve its supply chain while minimizing cost. Further, this has facilitated Home Depot to improve its Central Automated Replenishment System for immediate refilling of stock while reducing its investment in inventory.

However, the company’s business is highly competitive, primarily based on customer services, price, store location and assortment of merchandise. It faces stiff competition from local, regional and international players as well. To maintain its market share, the company is making selective acquisitions and strategic alliances with third parties, which are increasing its operational risks.

Home Depot, which competes with Lowe's Companies Inc. (LOW - Free Report) , currently has a Zacks #2 Rank, implying a short-term Buy rating.

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