The Home Depot, Inc. (HD) Improvement Company Finding Gains Among the Volatility

Sears Hometown is significantly more profitable than its struggling parent company. In 2011, the division took in over $2.3 billion in revenues and realized about $33 million in net profits. At its current float levels, the company produces over $100 in sales per outstanding share. Unlike its former parent, Sears Hometown continues to open new retail locations. It operates about 1,300 stores between its Sears Outlet and Sears Hometown and Hardware Divisions. Both store types cater to tradesmen, building contractors and “do-it-yourself” home improvement enthusiasts.

Sears Hometown and Outlet has not been not immune to the problems that have weakened Sears Holdings. The company has seen comparable-store sales and net profits decrease during the past three fiscal years. The deep slump in construction spending hit its core customer base of home-improvement contractors and home-builders. What’s more, it has been forced to slash its prices in order to remain competitive with larger home-improvement warehouse stores like The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) .  Both Home Depot and Lowes do over $50 billion in sales annually (compared to Sears Hometown’s $2.4 billion) and can use these sales figures to get inventory for lower prices than Sears Hometown.  Plus, Home Depot and Lowes can afford the ups and downs of the construction industry even with tight margins due to their cash reserves.

Ongoing economic trends could prove favorable for both businesses. As North American residential construction ramps up, Sears Outlet may see an uptick in demand from builders and contractors for its raw materials, tools and landscaping equipment. Likewise, Sears Holdings’s flagship retail outlets may see increased demand from retrofitting homeowners for its Kenmore-branded line of energy-efficient appliances. However, it is likely that Sears Holdings will continue to consolidate its core operations in the face of price pressure from discounters like Wal-Mart and Target.

By traditional metrics, both companies are significantly undervalued. If Sears Holdings and its new spin-off can produce several consecutive quarters of meaningful sales growth, the companies’ stock prices may rise sharply. Given the secular trends working in its favor, this would make the decision to spin off Sears Outlet look prescient.

The article Home Improvement Company Finding Gains Among the Volatility originally appeared on Fool.com.

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