HD Supply Sales Rise 10 Percent; Company Offers Weaker Outlook

By Jack Keough

HD Supply this week reported its first quarterly earnings statement as a publicly-traded company and although sales increased 10 percent, the numbers showed that the Atlanta-based company is still feeling the effects of the slow recovery in the construction market.

Company officials, however, are confident that a construction rebound has begun. At the same time, HD Supply issued a weaker sales outlook for the remainder of the year, causing its stock to drop sharply.

HD Supply was founded in 1997 as the professional services division of Home Depot.  In 2007, Home Depot sold HD Supply for $8.5 billion to private equity firms Bain Capital, Carlyle Group and Clayton Dubilier & Rice. Home Depot still holds about a 12.5 percent interest in HD Supply.

In releasing its earnings, HD Supply reported a net loss of $72 million for the second fiscal quarter ended Aug. 4, compared with a $56 million loss a year earlier, even as operating income increased.

Net sales for the quarter climbed to $2.26 billion from $2.06 billion in the prior year. Growth was seen across its key segments of Facilities Maintenance, Waterworks, and Power Solutions.

Results for the quarter included a $46 million loss on the extinguishment and modification of debt.

For the quarter, HD Supply, which began its listing on the NASDAQ Exchange under the ticker symbol HDS in late June, reported revenues increased 8 percent on an organic basis, which was slightly less than some analysts had expected.

Facility maintenance was up 12 percent while its Power Solutions business, which includes electrical, was up 4 percent. Its waterworks business was up 14 percent while its White Cap Construction segment increased 9 percent, considered somewhat disappointing as construction spending continued to be sluggish.

HD Supply is watched as a leading indicator since its products cover a wide range of industries.

“We see emerging signs of growth in the residential market sector in our White Cap and Waterworks business. We are seeing strong demand in Texas, Austin and Houston in particular for both the single family, multi-family markets,” said Joe DeAngelo, CEO of HD Supply in an earnings conference call with analysts.

“We believe we are strategically positioned to continue to benefit from this uptick and expect this positive momentum to continue,” he said.

The MRO end markets continued to grow at a measured and steady pace during the quarter driven by increases in occupancy in the multi-family and hospitality industries, he added. DeAngelo said that he expects this trend to continue.

“Current market outlook for our second half of fiscal 2013 is below our original expectations. We’re continuing to enhance our competitive position in large highly fragmented markets that offer significant opportunities for growth,” he said according to a transcript of the call provided by www.seekingalpha.com

Net sales were up despite limited growth in nonresidential and municipal end markets, as well as unusually cooler and wetter weather hampering outdoor construction and heating, ventilation and air conditioning product sales in various parts of the country, the company said in a press release.

In an interview with the Private Equity Beat blog published in the Wall Street Journal, DeAngelo predicted the residential construction market will grow at a fairly steady pace of 20% annually. In comparison, said DeAngelo, the nonresidential and municipal construction markets are lagging, with “flattish” growth this year or through 2014. After that, he predicted, the nonresidential market will increase at high-single digit rates, with the municipal market seeing “pent-up demand” after 2014.

“We are right in the strike zone of recovery,” he said.

The company also reported that net sales for the first half of fiscal 2013 increased $430 million, or 11 percent to $4.3 billion, as compared to $3.9 billion the first half of fiscal 2012.

Jack Keough was the editor of Industrial Distribution magazine for more than 26 years. He often speaks at many industry events and seminars. He can be reached at john.keough@comcast.net or keoughbiz@gmail.com

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