Tuesday, February 26, 2008

Profits drop?

It was just announced that Home Depot said that its 4th quarter profits declined by more then 27% (http://www.msnbc.msn.com/id/23349107/).  So?  Is this dire news?  Should one panic and dump Home Depot stock?  Should we stop shopping at Home Depot? 

Wow!  Home Depot profits went from $925 million to $671 million.  What does this mean?  Nothing!  Their revenues dropped so their profits dropped, too.  They also plan on only opening 55 new stores.  How many new Home Depot stores do we need?  When does it stop?  When you have a Home Depot across the road from a Home Depot?  This whole "grow or die" mentality is not rooted in reality.  You cannot keep increasing revenues and profits without havimng some type of ceiling.  It cannot go on forever.  Did any of them ever hear of expodential growth?  Well, it can't be sustained.  To better illustrate what I'm talking about do the following math example -

1.  Start with 1 penny.
2.  Doubel the amount from Step 1 (now you have 2 pennies)
3.  Again, double the amount (now you have 4 pennies).

Keep doing this 30 times.  What do you come up with at the end?  I come up with over $5 million dollars.  If you were to do this for real and startying with a penny on day 1, and double your pennies each day for 30 days, on day 30 you'd have to put in over $5 million dollars.  it's the same with what the corporations expect.  It just becomes unreasonable.  It becomes meaning less.

Should you keep shopping at Home Depot?  Sure, why not?  Should you shop around or buy blindly from Home Depot?  Shop around.  The whole purpose of opening all of those new stores is to make sure that there is a Home Depot store within a very short distance of you so that you don't shop around, you'll go to their store (because they believe you are lazy and stupid) because it is close and convenient, and you'll pay whatever they charge.

Remember, corporations never do anything because it is solely convenient for you or it is in your best interest.  These may be factors in their decisions, but only if the benefits to them outweigh the ones to you.

No comments: