Wither Home Depot stock?

Home Depot's plan to buy back $22.5 billion of its shares has given a much-needed lift to its underperforming stock, but the excitement could wear off quickly if history is a guide _ and if the retailer's promise to revitalize stores doesn't succeed in boosting sales.

A study by Birinyi Associates of Westport, Conn., a stock market research and money management firm, found that companies that don't announce stock buyback programs on average have seen similar gains in share price to companies that do.

The 385 S&P 500 index companies that announced stock buyback plans between 2000 and 2005 saw a median gain in their share price of 40 percent over that period, while the remaining companies that did not announce such programs saw a median gain of 39 percent.

Two companies in particular that announced stock buyback programs over the study period _ Armonk, N.Y.-based IBM Corp. and Irving, Texas-based Kimberly-Clark Corp. _ actually underperformed relative to the S&P 500 by more than 50 percent. On the other hand, Memphis, Tenn.-based AutoZone Inc. saw a 158 percent gain relative to the index over the study period after announcing a stock repurchase program.

"It's hit or miss," said Rob Leiphart, a Birinyi Associates analyst.

Home Depot's chief financial officer, Carol Tome, said in an interview this week that the world's largest home improvement store chain is doing more than just buying back stock to improve shareholder value. It's also reinvesting in its stores and working to improve customer service.

Even so, Tome acknowledged, 2007 remains a challenging year financially for the Atlanta-based company.

"We'll get through this," she said.

Investors were mostly bullish about The Home Depot Inc.'s short-term prospects following its dual announcements Tuesday about the stock buyback plan and its agreement to sell its wholesale distribution business to a group of private equity firms for $10.3 billion.

The company's shares rose nearly 5 percent on Wednesday but have since retreated some. They closed down 59 cents, or 1.5 percent, at $39.36.

Long-term, Home Depot will need to do more to keep the momentum going, said Edward Jones analyst Stephanie Hoff.

Investors are only appeased if the "fundamental business itself is creating shareholder value," Hoff said.

Customer service has been a sore spot for Home Depot in recent years. That perception was something former Chief Executive Bob Nardelli often battled and is what his successor, Frank Blake, has vowed to change.

"Customer service is one of the things that defines a great retailer," Hoff said.

She said the $4.5 billion in capital expenditures Home Depot plans in 2007, 25 percent higher than last year, is a good start. With fewer new stores being built, that means more of the money will be spent on improving existing stores.

"If you look at what Frank Blake is doing _ reinvesting in the stores, reinvesting in customer service _ then you kind of have to give him some benefit of the doubt that this company, while still a leader, can recover," Hoff said.

In a research note Friday, S&P analyst Stella Kapur cautioned that residential home improvement spending is expected to decline further, which will affect Home Depot's bottom line.

"Despite Home Depot's plans to improve its supply chain, store environment, employee morale and customer service, Standard & Poor's believes that weaker demand, increased competition, cannibalization, and a successful implementation of Home Depot's current plan will remain problematic," Kapur wrote.

For Home Depot's part, CFO Tome said the company believes it is heading in the right direction for customers and investors.

"We're not taking our foot off the gas," Tome said. "In fact, we're putting the accelerator down to the floor."

She said the stock buyback announcement, in particular, is about long-term growth, not short-term gain.

"What investors want most of all is consistency and a sustainability of earnings growth, and that is what we believe we will be gaining," Tome said.

And while stock buybacks may not, in and of themselves, provide long-term shareholder value, the huge size of Home Depot's announcement has other retailers thinking about their own programs.

The chief financial officer of Minneapolis-based Best Buy Co. said at an investor conference Thursday that Home Depot "set the high bar" in terms of what type of financial engineering one wants to do in driving shareholder value.

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On the Net:

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