I picked up some Jan $25 puts on HD yesterday.
After an especially frustrating trip to the nearest Home Depot last Friday, I spent the weekend going over their filings. Their recent average 13% reduction in inventory per store helps explain why the items I expected to put on a cart and load in the truck are only available by special order these days. In retail, reductions in inventory translate to reductions in customers. If a customer can't find what they want in stock at one place, they walk right across the street to the competition.
I've also noticed a substantial reduction lately in the number of personnel available to wait on customers. The last few times I've been in, check out alone took almost 15 minutes due to inadequate staffing of cashiers.
So much for personal experience with poor selection and bad service. The filings are interesting to say the least. Off balance sheet lease agreements amount to close to a billion dollars. Last year $84 million in interest payments were treated as capital invested in assets and was not expensed against earnings. Interest payments are a current expense and any other treatment is cooking the books as far as I'm concerned. The most interesting part about the interest paid is that the $28 million which did affect the bottom line plus the $84 million totals $112 million. According to the SEC filings, the only interest bearing debt on the books is $500 million at 6.5% and $500 million at 5.38% or a total of $59.4 million. That leaves another $52.6 million in interest being paid on debt which doesn't show up on the books.
Same store sales are down, which shouldn't be the case with low interest rates and a strong new construction market for the past year. A healthy retail chain should see something in the neighborhood of 4-6% same store sales growth year in and year out just to make up for inflation. Anything much less than that is a sign of serious operational problems and poor management decisions.
Directors of the company also have off balance sheet companies of their own which benefit from deals they make with themselves operating Home Depot. There is no disclosure whatsoever as to how much money is involved in these type of deals. In the mean time, compensation levels are absurd, especially for a company where management feels it's an unnecessary expense to staff stores with enough minimum wage cashiers to keep the lines moving.
The recent $2 billion buy back announcement doesn't make much sense other than for hype value. If their budget is so tight it's necessary to cut essentials like inventory and staff, why spend $2 billion on stock with a par value of a penny a share? Wouldn't that money be better spent, and provide a better return to shareholders, by investing it in the business?
Legislation in the process of becoming law strikes me as having a huge potential to affect a company like Home Depot. There are NO large cap value plays out there until the endemic abuse of GAAP has been cured. The rules are going to chance within the next year and trying to catch a falling large cap knife is suicide until those changes are priced into the market. HD "might" be a good value at $10, but until everything that should be disclosed on the balance sheet, is disclosed on the balance sheet, there's no way to guess. |
