Home Depot Jumps in with Both Feet - Modern Distribution Management

Home Depot Jumps in with Both Feet

Here’s the 300-word dissection of Home Depot’s pending acquisition of Hughes Supply. It adds a layer of complexity across a bunch of product channels at a time when there’s already plenty of pressure on margins. But this next step by HD is not a surprise to most. The issue was more when and where.


From an operational standpoint, HD has its work ahead to ratchet Hughes’ operating margins up from about 5 percent currently. The Home Depot’s current operating margins are at about 12 percent. But HD knows this wholesale distribution sector; its expectations are likely pretty grounded.


For those in industrial channels, there is a slight d’j’ vu feeling back to some high profile M& A activity in 1998 and 1999, just before industrial markets crashed. With the help of 20-20 hindsight, more than a few companies paid way too much and choked on debt. Will Hughes offer a hedge to HD if the housing market drops, as predicted by many? More to the point, the portfolio that HD now holds in its supply division, more than $10 billion by our count, certainly offers the diversification the company is seeking. This is a start.


Interestingly, more than a few observations have focused on the positives HD’s big splash into industrial channels brings – namely a larger infusion of equity buyers into the channel. There has been an increasing level of tire-kicking in 2005. Valuations are much healthier than the last several years.


The next wave of speculation will center on the MRO industrial channel. Hughes Supply’s MRO business accounted for 10 percent of its $4.4 billion in revenues in 2005. This is still a very fragmented industry. A lot of strong independent distributors have found ways to compete effectively with the HD model. That won’t change.

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