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Expo Expiration: Home Depot’s Loss Seen As Dealers’ Gain

The Home Depot’s decision to finally pull the plug on its 34 Expo Design Center stores couldn’t come at a better time for premium majap dealers, industry executives said.

Just as Circuit City’s shutdown will unleash sorely needed sales volume for CE retailers, Expo’s more than $100 million in annual sales of better appliances could be a shot in the arm for other white-goods dealers struggling with soft demand.

“While luxury appliance retailers will do less business in 2009 because of the current economy, high-end customers still want better products, and will find other retailers where they can see and buy their premium appliances,” said Marty Friedman, president of premium white-goods distributor Eastern Marketing. “The remaining luxury appliance retailers will do better now because of Expo’s demise.”

Warren Mann, senior VP of Haier America and former executive director of the MARTA Cooperative of America buying group, agreed that dealers who survive the shakeout stand to pick up share from those that don’t. However, he warned, the “lift” may be less than anticipated.

“Most dealers expect growth as consumers formerly buying from closed businesses such as Circuit City, Tweeter or Home Depot’s Expo stores get funneled into surviving retailers,” he explained. But these same dealers “already had taken the meaningful customer base, which is the reason why the chains were forced to closed their doors.” Still, over time, “it is inexorable that fewer storefronts mean more volume for those with continuing operations,” Mann said.

The long-struggling Expo business, which catered to the decorator trade, ranked 17th on TWICE’s Top 100 Major Appliance Retailers Report, just behind Sam’s Club and just ahead of R.C. Willey. Majap sales reached $136 million in 2007, an 8.7 percent decline from the prior year.

Eastern Marketing’s Friedman attributed its problems to high overhead and poor customer support on the sales floor. “This is just another example of volume retailers with high overheads that are not able to compete in low-mark-up categories,” he said, citing such other failed appliance chains as American Appliance, Brick Church, Circuit City, Friendly Frost, Lechmere, Newmark & Lewis, Silo and Two Guys.

“They had an excellent buying and merchandising staff and outstanding displays of high-end kitchen and outdoor appliances, but were very weak in the quality of their retail sales people,” Friedman said. “It continued as long as the economy was strong.”

Home Depot said it would shutter all 34 Expo Design Center stores over the next two months, along with five YardBirds stores, two Design Center stores and HD Bath, a bath-remodeling business with seven locations. The closures will result in the layoffs of 5,000 workers, including store-level associates and support- and distribution-center personnel.

The home-improvement chain acknowledged that Expo had underperformed “even during the recent housing boom” and that its prospects for improvement were nil, as the business “has weakened significantly as the demand for big ticket design and decor projects has declined in the current economic environment.” Continuing the operation would divert focus and resources from the company’s core “orange box” Home Depot stores, it said.

“Exiting our Expo business is a difficult decision, particularly given the hard work and dedication of our associates in that business and the support of our loyal customers,” chairman/CEO Frank Blake said in a statement. “At the same time, it is a necessary decision that will strengthen our core Home Depot business.”

It is unclear whether the retailer will attempt to retain some of Expo’s premium majap share through a reconfiguration of its appliance departments. But manufacturers of luxury white goods — and their higher-end dealers — are not likely to support the placement of their products within the home-improvement channel.

Separately, Home Depot is also restructuring its support functions to reduce costs. Measures include reducing headcount in administrative functions in its store support centers and continuing its shift to a region- and district-based support model in various field functions. The moves will result in pink slips for an additional 2,000 support personnel and 10 percent of the company’s officer ranks. Salaries are also being frozen for remaining officers.

“These changes,” Blake said, “will make us a stronger company and will allow us to continue to grow associate employment over the long term to benefit our customers.”

Home Depot projected that the actions will benefit fiscal 2009 earnings before interest and tax by approximately $305 million, primarily as a result of payroll savings and operational improvements from the shutdown of Expo.

The chain will likely take a total pretax charge of about $532 million, of which approximately $390 million will be recognized in the fourth quarter and the remaining $142 million will be recognized in 2009 and beyond. The charge consists primarily of fixed-asset write-offs, lease reserves on closed stores, severance and store-closing costs, the company said. The cash component related to severance and store closing costs is projected to be approximately $153 million over the next 12 months, and is expected to be offset by cash received for liquidated inventory.

The chain is sticking to it previous guidance for fiscal 2008 sales, which are expected to fall 8 percent, and for earnings per share from continuing operations, which will likely decline by 24 percent before the charges. Looking ahead, the company anticipated “continued weakness in sales” due to the broader economic downturn, and will reduce capital expenditures to approximately $1 billion in fiscal 2009. It will also limit new store openings to 12 locations this year.