HOME DEPOT, INC. in the New Millennium

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HOME DEPOT, INC. in the New Millennium
Tom Thomson, Suzanne Ma, Todd Humphrey, Owen
Clements June 28, 2006
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Agenda

• Background/History
• Current situation
• Accounting and Finances
• Growth Initiatives
• Financial Analysis
• Forecast

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HOME DEPOT Inc.

• Founded In 1978 in Atlanta, Georgia
• Largest Retailer of home improvement products
• Stores were warehouses and sold large volumes of
  goods at low prices
• Offered how-to-clinics and knowledgeable
  customer service representatives
• Between the Fall of 1981 End of 1999, stock
  price had risen at a compound annual rate of 29
• Uninterrupted growth in US economy since 1992

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Competitors

• Lowes was second largest home improvement
  retailer
• Highly fragmented industry
• Menards and Homebase smaller but concentrated
  in certain geographic areas
• Hechinger was main competitor initially but in an
  attempt to copy Home Depots warehouse style
  retail stores, went out of business

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Management Style

• Constantly evolving
• Evaluate new ideas on smaller scale before taking
  to entire store network
• Stores were located in all US states and Canadian
  provinces 2/3rd of stores opened in existing
  markets

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Current Situation

• October 12th, 2000 the company announced lower
  then expected earnings for the 3rd and 4th
  quarter
• Largest one day drop (28) to 35, a 33 billion
  loss in market capitalization
• Drop thought to be due to slowing economy,
  overvaluation of stock price or problems with the
  companys future strategic direction
• Economy had experienced uninterrupted growth
  since 1992

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Trivia Time with Todd!

• What proportion of the worlds countries had a
  GDP in 2004 less than 33 billion according to
  the world bank?
• 2/3
• 1/3
• 1/2
• 5/8
• 11/16

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Accounting Policies

• Point of Sale revenue recognition
• Cost as sold
• Perpetual inventory system
• Nothing interesting or exciting
• Everything is Kosher - Tom

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Growth Initiatives - Classroom Opinions

• Buy it Yourself customers
• Professional customers
• Store format changes
• Product category expansion
• International growth
• Internet sales

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Growth Initiatives - Buy-it-Yourself Customers

• Choose Products but Installed by Third-Party
• 6,200 third-party contractors
• Aging demographics
• Market for installation services estimated at 75
  billion
• Less than 2 of the installation market
• Grow by 40 each year for the next five years

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Growth Initiatives - Professional Customers

• Large Market potential
• Job Lot quantities
• Different needs for different customers
• Effect of professional customers on DIY
• Anticipated to influence sales the most out of
  all of the initiatives
• More cyclical then DIY business

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Growth Initiatives - Store Formats

• Extending into specialty shops
• Very high end product range
• Required retainer fee
• Sales goal for each customer (10,000)
• Investigating smaller stores to compete more
  directly with Home Hardware etc.

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Growth Initiatives - Product Categories

• Increasing product lines
• Adding appliances to complement current offerings
• Vertically integrate supply chain
• Tool rentals and truck rentals

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Growth Initiatives - International Growth

• Expansion into South America
• Joint venture in Chile
• Looking into expansion into the Far East

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Growth Initiatives - Internet Sales

• Information centre for customers
• Adding e-commerce abilities
• Intended to complement brick stores

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Talk Time with Tom!

• Small groups
• 10 minutes
• Evaluate each initiative individually
• Report back to us

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Growth Initiatives - Buy-it-Yourself Customers

• Excellent opportunity!
• Service will be key for this segment

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Growth Initiatives - Professional Customers

• Another opportunity!
• Largest and most profitable market
• Complement to the existing business

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Growth Initiatives - Store Formats

• Bad idea!
• Different business plan
• Doesnt fit well with current strategy and
  business plan

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Growth Initiatives - Product Categories

• Great idea!
• One stop shopping is the N. American way
• Why deliver when you can charge the customer to
  do it themselves?

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Growth Initiatives - International Growth

• Bad idea!
• Risky, risky, risky
• Saturate N. American market first
• Joint venture was the best method for entering
  this market

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Growth Initiatives - Internet Sales

• Hard to set up
• Expensive to maintain
• Peak of the dotcom boom
• Catalogue site, not order site

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Financial Analysis
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Forecast and Valuation

• Current Status
• Trending 25-27 growth.
• NOPAT of 6
• Debt to Equity 7 vs. 93
• Decreasing stock value 68 to 35.
• (From 12/99-9/00)

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What It Takes To Get 48.20?

• Observed price as of Feb 2001.
• Assumed flat NOPAT _at_6.
• Equates to sales growth _at_29

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What Will Be The Stock Price?

• OPTIMISTIC 26 _at_ 7 NOPAT
• Continued growth with Do It Yourself Business.
  Expand stores. Expand categories.
• 40 growth in Buy It Yourself Customers.
• At least 25 growth with Professional Customers.
  Large opportunity, high margin.
• Stock Price 60-62

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What Will Be The Stock Price?

• PESSIMISTIC 5 _at_ 6 NOPAT
• Some continued growth with Do It Yourself
  Business via store expansions bundling.
• Moderate success in Buy it Yourself Customers.
• Difficult to cross over with the Professional
  Customer base.
• Stock Price 11

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What Will Be The Stock Price?

• MOST LIKELY 15 _at_ 6 NOPAT
• Some success with in Buy it Yourself Customers.
  Less so with Professional customers.
• Extension of products, services, and stores-
  allows some growth with the Do it Yourself
  Customers.
• Difficulties in trying to do it all.
• Share Price 36

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What Will Be The Stock Price?

• OTHER FACTORS
• Even with all the right initiatives future
  remains questionable.
• History Very few companies can sustain HDs
  level of performance over a long period.
• There may be limits to growth.
• After all, companies do trend toward the overall
  economy.

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What actually happened

• Management change Dec. 2000
• Feb 2001 changed focus to quality
• Dec 2001 revised earnings down by 40
• July 2002 stock downgraded by M-L
• Lowes had outperformed for past 12 months
• Aug 2002 began hoarding cash
• Nov 2002 revenue missed growth predictions by 50

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And more

• May 2003 6 increase in sales
• Revert away from warehouse style stores
• Centralized shipping
• Continue to expect 18-20 growth

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Questions?