HD Supply finds survival a struggle

Wholesale distributor tries to reverse losses

HD Supply has faced two daunting challenges in the last three years.

First, the building supply company based in Cobb County was sold in mid-2007 by parent Home Depot, whose executives decided the division distracted from its core retail business. Then the housing industry tanked, taking with it a big chunk of HD Supply’s revenue.

Instead of building the business since the sale, Chief Executive Joe DeAngelo has had to hustle to keep it afloat. In its most recent financial report, for the quarter ended Nov. 1, HD Supply posted a loss of $267 million, close to triple the $91 million loss a year earlier.

Yet even while playing defense, DeAngelo’s readying an offense. He wants to position HD Supply for an initial public offering.

“The goal is to take it public by 2014 or 2015,” DeAngelo recently told The Atlanta Journal-Constitution. “It’s the only real exit strategy. That’s because it’s basically tough for someone else to buy us” due to the company’s size.

DeAngelo, 48, led the division at Home Depot and became HD Supply’s CEO after investment firms bought it for about $8.5 billion.

Not only is he personally invested in the company, but the heavy-hitting firms that own HD Supply — The Carlyle Group, Bain Capital and Clayton, Dubilier & Rice — look to him to bring a return on their investment.

DeAngelo said he and his staff have the battle scars to show how hard it has been to stay alive in this economy. So do a lot of former HD Supply employees.

The company has axed 4,500 jobs and consolidated 210 HD Supply branches amid the housing slump. It now employs about 16,000 people at about 800 locations nationwide, including 712 people at the Atlanta headquarters and area sales centers.

Residential housing was about 40 percent of HD Supply’s business, DeAngelo said. Its collapse affected other building sectors as well: Office and retail projects stalled, government projects were delayed awaiting stimulus money. Even apartment complexes suffered from high unemployment rates and people combining households to save money.

“We feel every element of the economy, whether it’s soft or hot,” he said.

As the economy receded, about $5 billion in revenue evaporated from HD Supply. Revenue for the 12 months ended Nov. 1 was $7.7 billion, according to documents filed with federal regulators, compared to fiscal year revenue of $12.6 billion in 2006, when HD Supply was still a division of Home Depot.

Competition in the highly fragmented industry is fierce, although most of the players specialize in certain areas. HD Supply considers its major rivals to be Ferguson, Rexel, Grainger, Anixter, Wesco, Fastenal and Watsco.

DeAngelo says he is done downsizing, and he believes HD Supply can be the largest heavy duty supply company in country.

He recently hired John Stegeman, CEO of Ferguson, to lead HD Supply’s electrical, plumbing/HVAC, waterworks, White Cap and Canadian divisions.

DeAngelo also has spent tens of millions of dollars on outside consultants who analyzed HD Supply’s markets, surveyed customers and analyzed the company’s position in the industry.

DeAngelo said his management team is using the information to put stronger systems in place and find new growth areas.

And despite its own troubles, the company last May bought California-based ORCO Construction Supply out of bankruptcy.

DeAngelo — trained as an accountant — said he cut about $100 million in costs last year through an initiative called “the bullet train.” It included a heavy use of technology to automate processes and go paperless where possible. He gave his sales staff a mobile application for their BlackBerrys to give them more visibility into the company’s stock and delivery times.

“As you digitize, you can scale like crazy,” said DeAngelo. “And the cost structure remains fixed while you grow. It’s not an investment intensive business — it’s just inventory and sales.”

Another strategy is to build on HD Supply’s status as a large distributor of apartment maintenance supplies. The division has seven call centers, nearly 600 account representatives and carries 45,000 products — more than the average Home Depot store — that apartment owners need for maintenance.

DeAngelo asked manufacturers to create private-label products for HD Supply, such as faucets and ceiling fans. The products can be cheaper for customers but also are designed specifically with multi-family housing units in mind. He doesn’t want the products to break or pose difficulties being installed.

“We design around reliability and ease of installation,” said DeAngelo, “using our knowledge of having done this work for decades.”

The path remains bumpy, however. Last month, Home Depot wrote down to zero the value of its $325 million stake in HD Supply. It has retained a 12.5 percent interest since the sale to the investment groups, although it is considered a passive investor and has no one on the board of directors. Home Depot also competes for some of the same customers and buys some products from HD Supply.

Moody’s Investors Service last fall lowered HD Supply’s ratings to Caa1 from B3, a downgrade that could make it harder or more expensive to get financing. Moody’s analyst Peter Doyle cited the company’s “substantial debt burden” and slow recovery in key markets.

Nevertheless, HD Supply this month negotiated with lenders to extend due dates on more than $3 billion in loans.

One recent morning, business was slow at two of HD Supply’s outposts — HD Supply Industrial branch and the HVAC & Electrical Branch, both in Norcross.

At the industrial branch, giant pipes are laid out in a yard next to a large warehouse with supplies for commercial and industrial plumbing projects. At the other branch, plumbers and electricians were picking up supplies for installations.

Brad Davis, general manager for the Georgia market, said the busy season is April through October when the weather is better for construction projects.

But one project put a smile on the face of Sam Mazich, industrial branch manager. He pointed to giant fittings waiting to be shipped to the Georgia Aquarium for its expansion project. A dark gray, 18-inch PVC coupling would retail for about $500 and a larger 24-inch coupling for about $1,000.

“You get one aquarium in a city in a lifetime,” said Mazich. “At least they did do an expansion. It’s a dream for us.”

DeAngelo exuded optimism that the company can use new strategies and products to rebuild market share as the economy comes back.

And he’s adamant the owner-investors will make money.

“I believe the return on investment will be off the charts,” he said. “That’s why our investors are sticking with us. It’s a good place to invest now to take advantage of markets that will recover.”

HD Supply facts

Headquarters: Cobb County

2009 revenue: $7.7 billion for 12 months as of Nov. 1 vs. $9.8 billion in 2008

Employees: 16,000 total, 712 in metro Atlanta

Ownership: Privately held by three investment firms that bought HD Supply from Home Depot in 2007 for $8.5 billion

What it does: HD Supply is among the largest U.S. wholesale distributors of heavy duty, infrastructure, maintenance, repair and specialty construction products. Customers include contractors, home builders, government entities, and professional plumbers and electricians

Divisions: waterworks, White Cap, facilities maintenance, utilities and industrial pipes, valves and fittings.

Sources: HD Supply, staff research.