The Home Depot Inc.’s former chief executive, Bob Nardelli, was a master of staying on message and strategy. A month after he resigned, the world’s largest home improvement store chain is showing it wants a change in direction.
The Atlanta-based company said Monday it will consider shedding its division serving contractors, homebuilders and other business customers. Nardelli had trumpeted Home Depot Supply as a growth business for the company.
Home Depot shares rose on the news.
Some analysts said the decision to possibly sell Home Depot Supply could benefit the company by allowing it to focus on generating value for shareholders, while others suggested it could put the onus back on the company’s retail side, where it faces tough competition from Lowe’s.
The announcement followed a decision earlier this month by Home Depot to give a seat on its board to an investment group that wants Home Depot to consider, among other things, a leveraged buyout of the entire company as a way to generate shareholder value.
The group, Relational Investors LLC, had threatened a proxy fight over the home-improvement company’s strategic direction, part of an undercurrent that led to Nardelli’s resignation in early January after six years at the helm of the company.
Frank Blake, who replaced Nardelli as CEO, said Monday’s announcement regarding Home Depot Supply was part of a strategic review the company conducted in November.
Nardelli had said repeatedly that he believed the company’s strategy under his watch did not need changing.
Home Depot said it may sell or spin off its wholesale distribution arm, Home Depot Supply, and has retained the investment firm Lehman Brothers as its financial adviser to assist in this process.
Blake said the company wants to concentrate more on its retail business.
The company said it would “evaluate strategic alternatives” that could also include an initial public offering of the supply business. Home Depot did not say how much it could fetch for HD Supply, but some analysts valued it at between $5 billion and $7.5 billion.
Analysts had mixed reactions.
“While we had long been advocates of the HD Supply business, the market never seemed to warm up to the strategy, viewing it more as a lower margin, lower return distraction from retail,” David Strasser, an analyst with Banc of America Securities, said in a research note.
Strasser said Home Depot’s stock should react positively to the news.
“This tells us new CEO Frank Blake is focused on value, and taking a fresh look at every aspect of the business,” Strasser wrote.
But Mark Rowen, an analyst with Prudential Equity Group, said in a research note of his own that without HD Supply as a growth vehicle, investors could soon start to focus more intensely on Home Depot’s core retail segment, which he believes is close to reaching store saturation in the U.S.
“We believe that Home Depot will continue to struggle with the effects of a difficult housing market in the near term, as well as intense competition from archrival Lowe’s longer term,” Rowen wrote.
Overall, Home Depot currently operates 2,159 stores in the United States, Canada, Mexico and China.
Just last year, Home Depot announced it had completed its $3.2 billion purchase of Orlando, Fla.-based Hughes Supply Inc., a distributor of construction, repair and maintenance products.
The deal, Home Depot’s largest acquisition ever, doubled the size of the HD Supply division, which serves business customers including municipalities and maintenance professionals.
The division was seen as a big opportunity for growth by former CEO Nardelli.
HD Supply has annual revenues of approximately $12 billion, has nearly 1,000 locations nationwide and in Canada, and employs more than 26,000 associates, the company said.
Home Depot shares rose 44 cents, or 1.1 percent, to close at $41.44 in Monday trading on the New York Stock Exchange.