Eric Aispuro
Stuart Martin
Ji Chong
Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03
Financial Analysis
Consolidated Statement of Earning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic Fiscal Summary For 2002 Business Operations . . . . . . . . . . . . . . . .
Chart: Home Depot's Stock Price (Mar. 02-Mar. 03) . . . . . . . . . . . . . . . . . .
Stock Price History: Significant Developments . . . . . . . . . . . . . . . . . . . . .
Chart: One Year Stock Price Comparison of Home Depot and Lowes . . . .
Chart: Five Year Stock Price Comparison of Home Depot and Lowes . . . .
Summary Statistics (as of Feb. 03) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current Investor Feasibility Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
04
05
07
07
09
10
11
13
13
14
14
15
16
16
17
Strategic Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Executive Summary
Because Home Depots performance has deteriorated over the last three years, the
company has asked Blaisdell Consulting to assess its position and make
recommendations for improvement. From a high of nearly $70 per share in
January 2000, Home Depots stock price has declined sixty percent to just over
$40 today. Although many factors are to blame, much of this loss can be
attributed to the market share losses to rival competitor Lowes Inc. With newer
and more modern stores, Lowes has taken away business from many of Home
Depots aging stores. Because of the success of Lowes Inc., coupled with the
current downturn of the American economy, Home Depot needs to take some
immediate and substantial steps to right itself.
As the largest warehouse home improvement retail company in the United States,
Home Depot has three times more stores than any of its competitors. Based out of
Atlanta Georgia, Home Depot specializes in do-it-yourself warehouse retail stores
offering building materials, home improvement products and related furnishings.
Operating in 1,502 stores worldwide, Home Depot employs about 280,000 people
and is credited with being the innovator in the home improvement retail industry
by combining the economies of scale inherent in a warehouse format with a level
of customer service unprecedented among warehouse-style retailers.
Ranging in of about 114,000 square feet per store (with an additional 20,000
square foot garden center), Home Depot caters to do-it-yourselfers, as well as
home improvement, construction and building maintenance professionals. Selling
a complete spectrum of Home Improvement consumer goods from single bulk
items (i.e. carpets) to more extensive projects such as kitchen cabinets alongside
in- house design centers and a new At-Home Services program.
To help Home Depot not repeat the history of K-Mart, which got overtaken by
WalMart and Target, Blaisdell Consulting has identified a Home Depot strategy
that will allow it to stay competitive and hold back the challenge of Lowes.
Blaisdell Consulting believes that Home Depot can stabilize growth and improve
earnings with a combination of store improvements and customer service funded
by retained earnings, alongside a large advertisement campaign alerting customers
to the change. After stabilizing its primary consumer base in the U.S., Home
Depot will then be free to grow internationally.
Financial Analysis
Elected Consolidated Statements of Earnings Data
The data below reflect sales data, the percentage relationship between sales and major
categories in the Consolidated Statements of Earnings and the percentage change in the
dollar amounts of each of the items.
IN PERCENTAGE
FISCAL YEAR(1)
-------------------------------------
INCREASE (DECREASE)
IN DOLLAR AMOUNTS
-----------------------
2001
2001
2000
----------
NET SALES
GROSS PROFIT
OPERATING EXPENSES:
Selling and Store Operating
Pre-Opening
General and Administrative
Total Operating Expenses
OPERATING INCOME
100.0%
30.2
--------
100.0%
29.9
1999
---------
100.0%
29.7
19.0
18.6
17.8
0.2
0.3
0.3
1.7
1.8
1.7
---------------------20.9
20.7
19.8
---------- -------- -------9.3
9.2
9.9
0.1
(0.1)
---------Interest, net
----------EARNINGS BEFORE INCOME TAXES
9.3
Income Taxes
3.6
---------NET EARNINGS
5.7%
---------SELECTED SALES DATA (2)
Number of Transactions (000s)
1,090,975
Average Sale per Transaction
$48.64
Weighted Average Weekly Sales
per Operating Store
$812,000
Weighted Average Sales per
Square Foot(3)
$387.93
vs. 2000
-------17.1 %
2000
vs. 1999
--------
18.0
19.0%
19.9
19.4
(17.6)
12.0
----18.2
----17.7
24.8
25.7
24.4
----24.8
----10.1
0.1
(0.1)
---------------9.2
3.6
-------5.6%
--------
0.1
(0.1)
---------------9.9
3.9
-------6.0%
--------
12.8
33.3
----(3.8)
----17.5
16.9
----17.9%
-----
27.0
(48.8)
----750.0
----10.9
10.2
----11.3%
-----
936,519
$48.65
797,229
$47.87
16.5%
--
17.5%
1.6
$864,000
$876,000
(6.0)
(1.4)
$422.53
(6.5)
(1.9)i
$414.68
(1) Fiscal years 2001, 2000 and 1999 refer to the fiscal years ended February 3, 2002; January 28, 2001;
and January 30, 2000, respectively. (2) Excludes Apex Supply Company, Georgia Lighting, Maintenance
Warehouse, Your "other" Warehouse and National Blinds and Wallpaper. (3) Adjusted to reflect the first
52 weeks of the 53-week fiscal year in 2001.
$671,000 per store in fiscal 2000. The decrease in the average expense per store
was primarily due to shorter pre-opening periods as Home Depot reengineered
their store opening process.
General and administrative expenses as a percent of sales were 1.7% for fiscal
2001 compared to 1.8% in fiscal 2000. This decrease was primarily due to cost
savings associated with the reorganization of certain components of general and
administrative structure, such as the centralization of merchandising organization,
and focus on expense control in areas such as travel.
Interest and investment income as a percent of sales was 0.1% for both fiscal
2001 and 2000. Interest expense as a percent of sales was 0.1% for both fiscal
2001 and 2000.
Home Depots combined federal and state effective income tax rate decreased to
38.6% for fiscal 2001 from 38.8% for fiscal 2000. The decrease in fiscal 2001
was attributable to higher tax credits and a lower effective state income tax rate
compared to fiscal 2000.
Net earnings as a percent of sales were 5.7% for fiscal 2001 compared to 5.6% for
fiscal 2000, reflecting the increased gross profit rate, which was partially offset by
higher store operating expenses. ii
iii
The Home Depot, Inc. reaffirmed that it expects to earn $0.31 diluted earnings per share for the
fourth quarter. The Company also indicated that it expects to earn $1.57 diluted earnings per share
for the fiscal year. Wall Street analysts on average were expecting the Company to earn $0.31 per
share in the fourth quarter and $1.58 per share in the fiscal year, according to Multex. Reuters also
reported that the Company expects sales at stores open at least a year to fall 3% to 5% in the fourth
quarter. In the year earlier fourth quarter, Home Depot's comparable -store sales rose 5%. The
Company cited lower lumber prices and an aggressive campaign to roll out new products as the
primary reason for its same-store sales decline forecast, according to Reuters.
Jan 02, 2003 The Home Depot, inc. Revises Fiscal Year 2003 Outlook Downward
The Home Depot, Inc. announced that it is revising its diluted earnings per share guidance for the
fiscal year ending February 2, 2003 from $1.57 to between $1.53 and $1.55. The change in
earnings per share outlook is due to slowing sales during the month of December, which lowered
the Company's expectation of a decline in comparable store sales in the fourth quarter to as much
as 10% versus previously provided guidance of a decline of between 3% and 5%. The Company
said lower customer transactions and lower-than-expected performance in traditional gift
categories like hardware and power tools severely impacted December results. Reflecting this
quarterly guidance, The Home Depot expects total sales growth of 10% and earnings per share
growth of 21% to 23% on a comparable 52-week basis for fiscal year 2003. According to Multex,
analysts expected the Company to report fiscal year 2003 earnings per share of $1.57 on total sales
of $58.83 billion.
Jan 28, 2003 The Home Depot, Inc. Announces Divisional Consolidation
The Home Depot, Inc. announced plans to consolidate its New England division with its Eastern
division that is headquartered in Atlanta, GA. The expanded Eastern Division will support more
than 600 Home Depot stores and have over 110,000 associates. The consolidation, which is
expected to take place over the next 60 days, will result in the transfer of merchandising and core
support functions from the Company's Canton, Massachusetts office to its South Plainfield, New
Jersey office. The company also said the consolidation would not have any impact on its
customers or result in any store closings or reduction of store jobs. iv
One Year (daily) Stock Price Comparison of Home Depot and Lowes
Five Year (weekly) Stock Price Comparison of Home Depot and Lowes
10
Top Competitors
Key Numbers
Home
Depot
Lowe's
Menard1
TruServ1
58,247.0
26,490.9
5,300.0
2,619.4
Employees
256,000
108,317
9,200
4,000
53,125.8
30,160.1
--
--
Home
Depot
Lowe's
Menard1
TruServ1
Industry 2 Market 3
31.99%
32.17%
--
--
30.87% 46.94%
10.18%
8.26%
--
--
8.52%
4.43%
6.29%
5.55%
--
--
5.26%
1.90%
Return on Equity
18.2%
18.5%
--
--
16.2%
3.8%
Return on Assets
11.7%
9.3%
--
--
10.0%
0.7%
17.1%
12.6%
--
--
13.4%
1.8%
Home
Depot
Lowe's
Menard1
TruServ1
Price/Sales Ratio
0.91
1.14
--
--
1.09
1.01
Price/Earnings Ratio
14.64
20.88
--
--
21.00
55.61
Price/Book Ratio
2.64
3.79
--
--
3.37
2.03
11.65
15.20
--
--
15.69
12.43
Home
Depot
Lowe's
Menard1
TruServ1
7.78
2.54
--
--
6.42
55.13
Inventory Turnover
5.1
4.5
--
--
5.1
7.7
71
81
--
--
71
47
Asset Turnover
2.0
1.8
--
--
1.9
0.4
50.0
137.8
--
--
56.0
6.5
37.8%
37.3%
--
--
38.2%
--
Home
Depot
Lowe's
Menard1
TruServ1
Current Ratio
1.52
1.59
--
--
1.66
1.31
Quick Ratio
0.6
0.4
--
--
0.5
0.9
Leverage Ratio
1.56
1.99
--
--
1.63
5.75
Total Debt/Equity
0.07
0.48
--
--
0.22
1.48
Interest Coverage
170.4
13.5
--
--
28.1
1.6
Profitability
Valuation
Operations
11
Industry 2 Market 3
Industry 2 Market 3
Industry 2 Market 3
Home
Depot
Lowe's
Menard1
TruServ1
25.04
33.92
--
--
24.38
19.73
1.56
1.85
--
--
1.27
0.36
0.21
0.11
--
--
0.14
0.40
1.96
2.54
--
--
1.70
1.61
2.03
2.86
--
--
1.98
1.67
0.57
4.79
--
--
1.66
10.79
8.65
10.19
--
--
7.92
9.88
13.48
20.25
--
--
12.87
56.77
Home
Depot
Lowe's
Menard1
TruServ1
8.8%
19.8%
--
--
0.0%
0.9%
20.4%
43.8%
--
--
0.0%
2.6%
20.9%
42.3%
--
--
0.0%
9.1%
23.5%
37.5%
--
--
0.0%
(2.4%)
15.1%
18.5%
--
--
11.5%
7.1%
16.6%
29.4%
--
--
11.2% (31.5%)
16.1%
27.8%
--
--
10.2% (41.3%)
22.2%
19.1%
--
--
11.5% (13.4%)
Growth
12
Industry 2 Market 3
Industry 2 Market 3
Home Depot
Business Profitability trends over last 11 years
1993
1994
1995
1996
4.57
6.12
7.21
0.22
0.29
0.34
0.02
0.03
42.3
33
1997
1998
1999
2000
2001
2002
2003
9.03
11
13.65
16.68
19.68
22.83
25.5
28.4
0.43
0.52
0.71
1.1
1.29
1.54
1.8
0.04
0.05
0.06
0.08
0.11
0.16
0.17
0.21
0.24
27.9
26.5
30.8
40.1
45.8
46.6
35.6
2.5
2.16
1.87
1.66
1.78
20.9
2.61
3.03
1.81
0.30%
0.30%
0.40%
0.40%
0.40%
0.30%
0.20%
0.30%
0.40%
Sales ($mill)
9238.8
12477
15470
19536
24156
30219
38434
45738
53553
58900
65500
457.4
604.5
731.5
937.7
1160
1614
2320
2581
3044
3650
4260
37.90% 38.30%
38.80%
Net Profit($mill)
Income Tax Rate
Net Profit Margin
5.00%
4.80%
994
918.8
842
983.4
720.1
13.10% 14.30%
13%
4.70%
38.90% 38.90%
39.20% 39.00%
4.80%
4.80%
5.30%
6.00%
5.60%
5.70%
6.10%
6.50%
1255.5 1867.30%
2004
2076
2734
3392
3636
4750
5425
1303
1566
750
1545
1250
1300
1300
13.30% 14.20%
16%
18%
15.90%
1246.6
13
Internal Rivalry
Home Depot faces a myriad of other competing businesses. However, Home
Depots unique warehouse size retail store allows it to employ cost-saving
economies of scale characteristics, while maintaining the specialty product and
personnel service that is popular with smaller size home- improvement product
and service retailers. Therefore, while price competition is very fierce in the
home improvement industry, the economies of scale exhibited by Home Depot
allow it to act more as a dominant firm with many smaller price-taking fringe
firms.
Home Depot has faced some serious competition as of late from other new home
improvement warehouse retailers. Lowes Inc. in particular has launched an
aggressive growth plan with an existing base of 800 stores, second only to Home
Depots 1,400 stores. Although the market share competition between the two
stores will lower profit margins for both corporations, the rapid growth rate of
Lowes Inc. implies empty market space and that more entry is possible.
In order to remain the largest home improvement/construction provider, Home
Depot must now refocus its business strategy to deal with the new competition.
Dealing mainly with the internal rivalry created by Lowes Inc., Home Depot has
already initiated several plans. Home Depot plans to invest $500 million in new
inventory, focusing on products such as rugs, appliances, and bathroom hardware.
Secondly, Home Depot plans to remodel all older stores and bring them up to date
with newer technologies and operating procedures. By 2005, Home Depot also
plans to expand its tool-rental program to include over 80% of its stores and
expand its presence into Mexico by adding two new stores.
14
In the more immediate future, Home Depot has unveiled a new national
advertisement campaign in order to gain a market edge amid growing
competition. The new advertisement motto reads, The Home Depot is more than
a store. You can do it. We can help. The Home Depot ad will play down the
role of price promotions and focus more on the services that home improvement
retailers have to offer. The role of service and contact with consumers will be
highlighted along with the emotional connection to consumers created at Home
Depot.
At the moment, Home Depot is the largest home improvement supplier in the
entire world. With the highest annual sales (58,347 mil), market value (53,125.8
mil), and largest number of employees (256,000), Home Depot has proven to be
the dominant firm in the market place. However, the question remains as to
whether Home Depot can maintain this dominant position. Lowes ga in in market
share over the past two years and aggressive growth plan is now becoming a
major threat to Home Depots continued existence. Lowes recent 4th quarter
earnings for 2003 rose 46% and created a six percent or two dollar increase in the
stock market valuation, while Home Depot reported lower earnings which
resulted in a standstill growth of two cents in its stock market valuation.
Alongside its growth, Lowes gross profit rates, return on equity and other
accounting figures are comparable, if not better, to Home Depots.
It seems clearly understood that Home Depots earlier and somewhat lethargic
corporate strategy is quickly changing in response to the intense competitive
challenge from Lowes Inc. It remains to be seen whether Home Depots new
strategies will work, or whether Lowes Inc. will continue to eat away at Home
Depots market share.
Entry
While it is easily possible for any business entrepreneur to open a homeimprovement store, it is much more difficult to build a warehouse size retailer
even closely comparable in size to Home Depot. Building such a huge warehouse
size retail store requires a large amount of capital and thus prohibits most from
being able to accomplish it. Due to this barrier to entry, most stores are smaller in
size and cannot extract the same type of cost-saving economies of scale from
business operation. This both blocks new entrants from entering the home
improvement/construction market and inhibit the growth of existing stores to
reach the required size to effectively compete by exercising economies of scale.
Although this capital- intensive barrier to entry prevents most entrants, it does not
prevent all. Newly created warehouse retailers and rapidly growing existing
15
retailers have shown that the marketplace has displayed enough profit incentive
for new entrants to take the chance.
Supplier Power
The Labor and Materials needed in order to operate a home improvement store is
comparable to other businesses. Most employee positions do not require
extensive training and the stock materials bought by Home Depot for sale can be
bought from many potential materials providers. In order to get the lowest costs,
Home Depot exerts an enormous amount of buyer power against its suppliers by
negotiating in bulk as an entire corporation. By buying bulk for an entire chain of
1,400 stores, Home Depot is able to demand much lower costs from most
suppliers by sheer volume of order. Each bulk supplier is then predetermined for
every good at each store by the head corporation in order to keep costs at their
lowest.
By following Standard Operating Procedures, individual Home Depot stores then
buy from these predetermined suppliers in quantities decided by the regional
manager. Therefore, while the regional manager determines the actual quantity of
each good, allowing the entire corporation to collectively exert buyer power
maximizes the money saved on the bulk goods.
Buyer Power
As for customers of Home Depot, business is attracted for the same reason as any
other warehouse/bulk retailer. Desirable pricing coupled with service (both
personal and product), attract any rational consumer who is trying to get more for
his money. The cost advantage inherent in Home Depots large warehouse
retailing allows it to simply sell the same products at cheaper prices than the
competition. Therefore the only reason that a rational consumer would shop
16
somewhere other than a warehouse retailer would be for reasons other than price,
which is generally service quality.
Historically, one of the main advantages that smaller stores would generally have
is the benefit of customer service. However with the rapidly increasing
competition, Home Depots new focus is exactly that. With competitive price
promotion as a staple of Home Depots advertisement campaign, supportive and
helpful customer service has become Home Depots new focus. With this
advantage gone, competition with Home Depot and other warehouse retailers is
going to become that much more difficult if not impossible for smaller home
improvement suppliers.
17
Strategic Recommendation
Corporate Expansion and Image Improvement
The last two years have been witness to an increasingly poor company
performance by Home Depot Inc. Although some of this financial downturn can
be attributed to a general economic slowdown in the wake of September 11, other
more serious factors are also at fault. Home Depots stock price has fallen from a
per share stock price of near $70 to under $25 in the last three years. It is clear
that Home Depot must quickly change its strategy in order to remain the worlds
top home improvement retailer.
Due to Home Depots unique retail configuration, it has had a specific advantage
over other retailers that were in direct competition with it. This advantage
allowed Home Depot to become a powerful, if not dominant, firm in the home
improvement retailing industry. However, new entrants are becoming an
increasingly dangerous threat to Home Depot. Lowes Inc. in particular has been
the most successful of Home Depots competitors and has increased its stock
price by 83% in the last two years, even in a poor economy.
While both Home Depot and Lowes offer relatively low prices because of their
cost saving economies of scale, Lowes has managed to build a very positive
service and quality reputation. Home Depot sells its bulk goods at prices
comparable to those of Lowes, but has been losing market share to competitors
because of its comparably worse service and customer care. While customers
would be indifferent to the similar prices of two stores, the bundled good of price
with service would cause home improvement customers to go to alternative stores
rather than Home Depot. In order to respond to the situation, Home Depot has
initiated a program to improve quality and service and launched a new national ad
campaign to call attention to these changes.
Home Depots ad campaign addresses the problematic issue of store image.
Much of Lowes success can be attributed to its positive reputation with
consumers. Home Depots new campaign is an attempt to assure consumers of
Home Depots commitment to improved quality and service-oriented focus.
Commercials and advertisements show everyday people receiving satisfaction
by accomplishing home improvement tasks with the help of Home Depot. Chief
Marketing Officer John Costello stated that Home Depot would continue to lead
the market by sticking to what it does best. vi Assuming Home Depot can improve
its image through marketing and real changes to improve store quality and in
customer service, Home Depot would have more than the capacity to resume the
pre-competitive corporate growth rate.
18
In order to find the effectiveness of the ad campaign on the Home Depot image, a
random poll was taken regarding the responses to the new Home Depot
commercials and advertisements.
Like the ads a lot
All respondents
23%
21%
16%
Female respondents
30%
All respondents
4%
13%
22%
22%
Overall, Home Depots best chance for success is to focus its strategy on several
key efforts. By continuing to expand both within the US and internationally in
underdeveloped markets, Home Depot will be able to continue corporate growth.
Equally important is the advancement of an aggressive advertising campaign
backed by improved current stores and customer service practices that will allow
Home Depot to hold its current market share.
21