Home Depot Takes Wrecking Ball To Stores
Maurna Desmond, 05.01.08, 6:00 PM ET

The economy has been hurting since the subprime mortgages began their tumble toward foreclosure, taking anything housing related, especially home goods, along for the bumpy ride.

On Thursday, Home Depot announced that it was shutting down 15 of its underperforming flagship stores. The mercy killings are supposed to wrap up in the next few months with 1330 employees being axed or reassigned. Wall Street rallied after the tough love announcement. Home Depot added 3.7%, or $1.07, to $29.87 at the close of trading in New York on Thursday.

Excluding charges, the company said its earnings per share from continuing operations will decline by 19% to 24% for fiscal 2008. Home Depot releases its first-quarter results May 20.

It was only 4 1/2 years ago that Home Depot former Chief Executive Bob Nardelli said that the retail chain could sustain "unlimited growth" without significantly lessening sales at established stores. Those boom times are long gone.

In a bleeding real estate market and with new management at the helm, the Atlanta-based company has pulled back on expansion plans and is excising vestigial parts. The company said it still plans to open 55 new stores in the 2009 fiscal year, though it will nixed plans to open 50 other U.S. stores that have been in its new store pipeline.

"By building fewer stores, in the best locations, and making sure our existing stores are profitable, our company will be in a much stronger competitive position," said CEO Frank Blake, who took over for Nardelli in January 2007.

These tough calls weren't in the game plan a year and a half ago. In September 2007, it had been reported that Blake said he had no plans to make any broad-based job cuts or reduce the number of its core retail stores in the face of a persistent housing slump that wasn't expected to improve anytime soon.

In December, Home Depot said it would cut 950 jobs and close three call centers that manage orders for home installation. In January, Home Depot said it would cut 500 jobs at its headquarters.

Home Depot has sought over the last year to focus more on its core stores. In August 2007, it sold its wholesale distribution business, HD Supply, to a group of private equity firms for $8.5 billion.

The store closures with cause charges of $186 million, including inventory markdowns of $11 million and severance of $8 million. It also will record a charge of $400 million related to development costs and ongoing obligations involving scrapped future store locations.

"Demand will remain somewhat depressed for the next several years, especially in the U.S.," said Zahid Siddique, a building products analyst with Gabelli & Co. "I don't think there's really any incremental benefit from opening these new stores."

The company said that new store capital spending will be lowered by $1 billion over the next three years.

Home Depot operates 2,258 stores in the United States, Canada, Mexico and China.

Home Depot rival Lowe's revealed plans in March to delay nearly 20 slated new store openings in areas hit hardest by the flimsy housing market and stubborn credit crunch. “The delays are based on where we think we can be most successful in 2008,” said Lowe's spokeswoman, Chris Ahearn. Although the Mooresville, N.C.-based retailer hasn’t broken down stalled store plans on a state-by-state basis, Ahearn mentioned California and Florida as areas where declining home values have strained the home improvement market.