05/02/2008 08:24 am ET | Updated May 25, 2011

Home Depot Forced To Go On Orange Diet

Retailer Cancels or Shuts Down 65 Stores

Home Depot's pipeline of new stores has a hole in it -- and it's bleeding orange everywhere you look. Citizen opposition to Home Depot stores is partly to blame for this hemorrhaging.

On May 1st, Home Depot released a press statement from its headquarters in Atlanta, Georgia, with the innocuous title, "The Home Depot Updates Square Footage Growth Plans." The next sentence wasn't much help either: "Company Focuses on Free Cash Flow and Returns." It turns out that the source of its "free cash" was derived from its plan to remove "50 Future Openings from New Store Pipeline."

This year, Home Depot will open "only" 36 new stores in the United States, and 19 stores in other countries. The other foreign locations were not disclosed. In addition to canceling 50 new projects, the world's largest home improvement chain said it was shutting down 15 operating stores across America, bringing the total to 65 stores abandoned or closed.

As many as 1,300 Home Depot 'associates' could lose their jobs. The store managers and assistant store managers at these locations, however, will be offered other store management positions within the organization -- but the "rest of the associates" will only get work "where available." Home Depot CEO Frank Blake said closing stores "is always a difficult decision," but he added, "our decision to slow future store growth... is the right decision and will bring long-term benefits to our associates and to our shareholders."

Home Depot has 2,258 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces, Mexico and China. In fiscal 2007, Home Depot had sales of $77.3 billion and earnings of $4.2 billion---which makes it a more profitable company than Wal-Mart, measured by earnings per dollars of sales. This store cutback was euphemistically called a "strategic plan," similar to Wal-Mart's startling announcement 11 months ago that it would sharply narrow its pipeline of new superstores. Home Depot says its decision to abandon 36 new projects in 2008 "centers on the Company's capital efficiency model to improve free cash flow, provide stronger returns for the Company and invest in its existing stores to continue improving the customer experience."

Because of citizen opposition to Home Depot stores, the lead time for getting approval for a store has stretched from 3 or 4 months, to two years---or much longer. The company admitted as much in its press release. "The Company has determined that it will no longer pursue the opening of approximately 50 U.S. stores that have been in its new store pipeline, in some cases for more than 10 years."

By cutting back on the roster of new stores, Home Depot can tell Wall Street that its capital spending on new stores will be constrained by $1 billion over the next three years. This, the company says, means "stronger returns and enhancing the Company's capital efficiency model." Those last three words in laymen's terms means the retailer has been wasting its money on projects that either don't come online, or that steal from other company stores when built---the term is cannibalization. This is a form of capital inefficiency.

Home Depot described its new store diet as a "disciplined approach" to how it invests in growth, and will allow the company to focus on "our core retail business, in this case our existing stores, which drive our most profitable sales." Rather than chase a prospective buck at a new store, they will try to improve the sales productivity at its current stores. That means more store maintenance, redoing the look of the store, and other strategies to "improve all elements of the customer's shopping experience."

All this is code language for the fact that Home Depot over-reached, was growing too fast, with stores that were located too close to one another. The souring housing market would not sustain the retailer's current level of growth, and consumers aren't spending as much on home improvement projects, as consumer confidence tanks, and discretionary income falls. As far as shutting down existing stores, Home Depot says it performed a thorough evaluation of its "store portfolio," and decided to shutter 15 underperforming U.S. stores that do not meet the Company's targeted returns.

Blake mentioned the retailer's over-saturation in his rationale for thinning out its stores: "We put our real estate projects through a tight capital efficiency model. This model prioritizes locations that make the most efficient use of capital, reduce cannibalization and drive higher returns. 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."

The 15 "loser" stores are located in: East Fort Wayne, Indiana; Marion, Indiana; Frankfort, Kentucky; Opelousas, Louisiana; Cottage Grove, Minnesota; East Brunswick, New Jersey; Saddle Brook, New Jersey; Rome, New York; Bismarck, North Dakota; Findlay, Ohio; Lima, Ohio; Brattleboro, Vermont; Beaver Dam, Wisconsin; Fond du Lac, Wisconsin; and Milwaukee, Wisconsin. Closing these 15 stores will cost the company $186 million. Cancellation of the 50 stores will cost the company another $400 million in "capitalized development costs and ongoing obligations" at those sites. The axed stores will go dark within the next two months.

In many of these locations, area residents will be thrilled that the orange logo is coming down. In Brattleboro, Vermont, for example, Home Depot opponents in 2003 encouraged their neighbors to stay away from the new Home Depot when it opened. Home Depot called that boycott " the least this is most undemocratic." A group called BrattPower created a three part campaign: (1) to convince Home Depot not to set up shop in Brattleboro through a vigorous petition and educational campaign; (2) failing that, to encourage the greater community to continue to buy local while boycotting Home Depot; and (3) to be working for changes in the regulations and laws of the town government so as to prevent box store development in the future. "We do not need, or want, nor do we intend to support a Home Depot in Brattleboro," the group said. That vigorous 'Boycott Home Depot' campaign paid off this week, creating one of the 'underperforming' stores on Home Depot's hit list.

It's not just the faltering economy that wounded Home Depot. It's bad management decisions at the grassroots level, where the color of opposition is green -- not orange.

Al Norman is the founder of Sprawl-Busters.