Home Depot Profile

Home Depot

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Company Profile

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Reference Code: 3484

Publication Date: June 2005

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Home Depot

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HOME DEPOTTABLE OF CONTENTS

TABLE OF CONTENTS

Company Overview ....................................................... 4

Key Facts........................................................................ 4

Business Description.................................................... 5

History ............................................................................ 7

Key Employees ............................................................ 10

Major Products And Services..................................... 15

Products And Services Analysis................................ 16

SWOT Analysis ............................................................ 18

Top Competitors .......................................................... 24

Company View ............................................................. 25

Locations and Subsidiaries........................................ 29

Home Depot


HOME DEPOTCompany Overview

COMPANY OVERVIEW

Home Depot is the world’s largest home improvement retailer, and the third largestretailer in the US. Home Depot stores sell a range of home improvement, garden, andlawn products as well as an assortment of building materials. The company operatesover 1,500 stores in the US, Canada and Latin America. It is headquartered in Atlanta,Georgia.

For the fiscal year ended February 2004 the company achieved revenues that totaled$73.1 BN, an increase of 12.8% against the previous years revenues that totaled$64.8 BN. Fiscal 2004 net earnings totalled $5BN an increase from 2003’s $4.3BN.

KEY FACTS

Head Office Home Depot2455 Paces Ferry RoadAtlantaGA 30339 4024United States

Phone +1 770 433 8211

Fax +1 770 384 2356

Web Address http://www.homedepot.com

Revenues/turnover(US$ Mn)

73100

Financial Year End January

Employees 299000

SIC Codes SIC 5211 Lumber and Other Building Materials DealersSIC 5251 Hardware Stores

NAICS Codes 44411, 44419, 44413

New York Ticker HD

Home Depot


HOME DEPOTBusiness Description

BUSINESS DESCRIPTION

Home Depot is the world’s largest home improvement retailer. The company operatesover 1,500 Home Depot, EXPO, and other subsidiary companies throughout the US,Canada and Mexico.

Home Depot stores offer a broad assortment of merchandise and services, and servethree primary customer groups: do-it-yourself customers, do-it-for-me customers andprofessional customers.

A typical Home Depot store stocks approximately 35,000 product items, major productgroups include: building materials, lumber and millwork; plumbing, electrical andkitchen; hardware and seasonal, and paint, flooring and wall coverings.

EXPO Design Center stores offer complete interior design services and installationservices to assist its customers in their home decor and re-modeling projects. EXPODesign Center stores feature design showrooms, each with full-size displays to helpcustomers visualize the end result of possible interior design projects.

Typically, customers at EXPO Design Center stores are middle to upper income do-it-for-me customers, who purchase merchandise for installation by others. Accordingly,the company offers installation services for most of the products it sells at thesestores. Additionally, its trade customers are custom builders, re-modelers, designersand architects. EXPO Design Center stores offer interior design products andinstallation services in: kitchens, baths, décor, lighting, flooring, appliances, patio,decorative fabrics, window treatments, home storage and organization andaccessories.

In addition, the company operates seven urban stores. These offer products for homeenhancement and small projects. The company has opened three urban stores, onein Brooklyn, New York, with approximately 61,000 square feet; one in Staten Island,New York, with approximately 79,000 square feet, and the other is a two-level storewith approximately 80,000 square feet in Chicago, Illinois.

These stores carry approximately 20,000 items, which are selected depending uponthe particular neighborhood in which the store is located. The company’s fourVillager’s Hardware stores, all of which are located in New Jersey, have been re-branded as Home Depot urban stores.

Home Depot


HOME DEPOTBusiness Description

The company also has one test store in Texas, The Home Depot Floor Store, whichsells only flooring products. This is a pilot operation launched in Plano, Texas. TheFloor Store offers flooring products including carpet, ceramic, wood, laminate andvinyl flooring.

The company also offers products through two direct marketing subsidiaries,Maintenance Warehouse and National Blinds and Wallpaper. Its MaintenanceWarehouse subsidiary is a direct marketer of maintenance, repair and operationsproducts, serving primarily the multi-family housing and lodging facilities managementmarket. The company fills orders through its 21 distribution centers, which are locatedthroughout the US.

National Blinds and Wallpaper sells decor products through telephone sales and overthe Internet. It markets primarily through magazine advertising aimed at customersseeking the lowest prices. It maintains no inventory, as orders are shipped directlyfrom the supplier to the customer.

The company also operates three other wholly owned subsidiaries: Georgia Lighting,Apex Supply Company and Your "other" Warehouse.

Georgia Lighting, a specialty lighting designer, distributor and retailer, has seven retaillocations in Georgia. Apex Supply Company is a wholesale supplier of plumbing,heating, ventilation and air conditioning (HVAC), appliances and other relatedprofessional products, with around 22 locations in Florida, Georgia, Tennessee andSouth Carolina. Your "other" Warehouse is a plumbing distributor that focuses onspecial order fulfillment through its four facilities located in Louisiana and Nevada.

Internationally, Home Depot has sold its five stores in Chile to its former joint venturepartner, Falabella, and has also sold its four stores in Argentina. The company hasacquired TotalHOME de Mexico, a large Mexican home improvement retailer withthree stores in Monterrey and one in Mexico City. Home Depot has also purchasedDel Norte, a four-store chain of home improvement stores in Juarez, Mexico.

To complement the national brand name products it offers, the company has formedstrategic alliances with vendor partners to market products under brand names thatare only offered through The Home Depot. It offers products under more than 30proprietary and other exclusive brands, including Thomasville kitchen and bathroomcabinets; RIDGID power tools; Behr Premium Plus paint; Mill’s Pride cabinets; GESmartWater water heaters, and Vigoro fertilizer.

Home Depot


HOME DEPOTHistory

HISTORY

Bernie Marcus and Arthur Blank formed Home Depot in 1979 in Atlanta, Georgia. Thecompany held its IPO in 1981, and listed on the NYSE three years later. With theproceeds of this, the company acquired Bowater Home Centers in order to extend itspresence in the US. The company’s first super-sized store was opened in 1986. Thiswas the year in which sales first exceeded $1 billion.

The company decided to expand into new markets and launched its first EXPODesign Center in San Diego, in 1990. By this time, the company had over 170 storesnationwide, and sales of over $5 billion. The company entered the Canadian market in1994 with the acquisition of Aikenhead.

Further acquisitions followed in 1997, when Maintenance Warehouse and NationalBlinds & Wallpaper were added to the company. In that year sales broke $20 billion forthe first time. In the following year, the company opened its first South American storein Santiago, Chile.

The company continued to expand its range of stores and launched its Villager’sHardware brand in 1999. That same year, the company acquired its wholly ownedsubsidiary, Georgia Lighting, a specialty lighting designer, distributor and retailer.

In January 2000, Home Depot acquired Apex Supply, a wholesale distributor ofplumbing, HVAC, appliances and other related products. Also that year, the companyopened the first Home Depot stores in Argentina and Canada, and also opened a teststore in Plano, Texas, offering flooring products.

In October 2001, the company sold its five stores in Chile to its former joint venturepartner, Falabella. Also that year, the company acquired Your "other" Warehouse. Thissubsidiary was a plumbing distributor that focused on decorative and commercialplumbing products, including special orders.

Also during 2001, the company acquired TotalHOME de Mexico, a large Mexicanhome improvement retailer that has three stores in Monterrey and one in Mexico City.

In February 2002, the company sold its four stores in Argentina. Then the followingmonth, Home Depot announced that it had entered into an agreement to purchase DelNorte, a four-store chain of home improvement stores in Juarez, Mexico.

Home Depot


HOME DEPOTHistory

Later that year, the company opened the first three of its Home Depot urban stores(two in New York and one in Chicago). The Villager’s Hardware stores were re-branded as urban stores in connection with this new venture.

Meanwhile, in September 2002, the company joined its Mid-Atlantic division andSoutheast division to form a new division that serviced stores in the Mid-Atlantic andSoutheastern US and Caribbean. It was renamed the Eastern Division

Further consolidation occurred in January 2003, when Home Depot consolidated itsNew England division with its Eastern division, headquartered in Atlanta, Georgia.The expanded Eastern division supports more than 600 Home Depot stores and hasover 110,000 associates.

The Home Depot announced in September 2003 that it has entered into anagreement to acquire Tampa, based, Installed Products USA, LLC and InstalledProducts of California, Inc. The privately owned IPUSA, one of the largest installers ofresidential replacement roofing in the United States, had been a contractor to HomeDepot for roofing installation since 1997.

The company announced that it has signed a definitive agreement to acquire Atlanta-based RMA Home Services Inc. in November 2003, a contract installer ofreplacement windows and siding. RMA was to become part of Home Depot’s At-Home Services group, the business unit that provides home installation services for its"do-it-for-me" customers.

The Home Depot confirmed in January 2004 it has completed the purchase ofCreative Touch Interiors (CTI), a leading turnkey design center provider for majorhomebuilders in Southern California and Las Vegas.

Home Depot & MetLife Auto & Home announced in March 2004 that they would bejoining forces to provide repair materials and installation services for MetLife Auto &Home customers. This enhanced service was to be be available nationally tocustomers reporting insurance claims that involve home repairs.

Home Depot announced in May 2004 that it has entered into an agreement to acquireWhite Cap Construction Supply, Inc., a leading distributor of specialty hardware, toolsand materials targeting large- and medium-sized construction contractors. Theacquisition would expand its professional customer market base.

The company announced it had signed a definitive agreement - also in May 2004 - toacquire Home Mart, the second largest Mexican home improvement retailer. Home

Home Depot


HOME DEPOTHistory

Depot planned acquire 20 Home Mart locations, bringing its total store count inMexico to 39 stores.

The Home Depot announced in June 2004 that it will formally create a businessdevelopment operation based in China and named Bill E. Patterson to the newlycreated position of President of The Home Depot Asia. Mr. Patterson lead thecompany’s expansion into China, one of the largest and fastest growing markets in theworld.

July 2004 saw the company announce plans to establish a new technology center inAustin, Texas, and a separate customer service center for The Home Depot Supplydivision in New Braunfels, Texas.

In February 2005, the Home Depot and Mark Burnett Productions announced that thecompanies had entered an alliance to develop programmes that highlight the HomeDepot’s products and services in Burnett produced television programming. Throughthe partnership, the Home Depot will be integrated into multiple MBP programsincluding ’the Apprentice III’ and ’the Contender’. The presence of Home Depotproducts on these reality TV shows is seen as valuable marketing by the company.

Home Depot


HOME DEPOTKey Employees

KEY EMPLOYEES

Name Job Title Board CompensationRobert L. Nardelli Chairman of the Board, Pres-

ident, Chief Executive OfficerExecutive Board $20,030,158

Tom Taylor Executive Vice President Executive Board

Francis Blake Executive Vice President Executive Board

Gregory D. Brenneman Director Non Executive Board

Richard H. Brown Director Non Executive Board

Dennis M. Donovan Executive Vice President of Human Resources

Senior Management $3,412,602

Carol B. Tome Chief Financial Officer, Exec-utive Vice President


Francis S. Blake Executive Vice President - Business Development and Corporate Operations


Robert P. DeRodes Executive Vice President - Information Technology, Chief Information Officer


John H. Costello Executive Vice President - Merchandising and Chief Marketing Officer

Senior Management

Frank L. Fernandez Executive Vice President, Secretary, General Counsel

Senior Management

Home Depot


HOME DEPOTKey Employee Biographies

KEY EMPLOYEE BIOGRAPHIES

Robert L. Nardelli

Board: Executive BoardJob Title: Chairman of the Board, President, Chief Executive OfficerSince: 2000Age: 54Salary: $11,153,668Total Annual Compensation: $20,030,158

Robert L. Nardelli has been President and Chief Executive Officer since December2000 and Chairman since January 1, 2002. Prior thereto, Mr. Nardelli served asPresident and Chief Executive Officer of GE Power Systems, a division of GeneralElectric Company, since 1995. Mr. Nardelli serves as a director of The Coca-ColaCompany.

Tom Taylor

Board: Executive BoardJob Title: Executive Vice President

Taylor joined Home Depot Stores at 16 and worked his way up from part timeassociate, to Department Head, Assistant Store Manager, Store Manager, DistrictManager,and in 1996 he was appointed to Regional Vice President in the Southwestdivision.From 2001 to 2002 Taylor served as Senior Vice President of Pro Business,then from 2002 to 2005, he served as division president, Eastern Division. He waspromoted to this post in February 2005.

Francis Blake

Board: Executive BoardJob Title: Executive Vice President

Blake joined the Home Depot in 2002, as Executive Vice President of BusinessDevelopment and Corporate Operations. Blake previously served as DeputySecretary for the US Department of Energy, a role similar to that of chief operatingofficer in the private saector. He has also served in a variety of executive roles atGeneral Electric. Blake has also served as General Counsel for Vice PresidentGeorge Bush, and law clerk to Justice Stevens of the U.S Supreme Court.

Home Depot



Gregory D. Brenneman

Board: Non Executive BoardJob Title: DirectorSince: 2000Age: 41

Mr. Brenneman has been Chairman and Chief Executive Officer of TurnWorks, Inc., aprivate equity firm, since October 2002. President and Chief Executive Officer ofPricewaterhouseCoopers Consulting from June 2002 to October 2002. President ofContinental Airlines, Inc. from 1996 to 2001 and member of the Board and ChiefOperating Officer of Continental Airlines from 1995 to 2001. Member of the Board ofAutomatic Data Processing, Inc.

Richard H. Brown

Board: Non Executive BoardJob Title: DirectorSince: 2000Age: 55

Mr. Brown has been Chairman and Chief Executive Officer of Electronic DataSystems Corporation from 1999 to March 2003. Chief Executive Officer of Cable &Wireless plc from 1996 to 1998. President and Chief Executive Officer of H&R Block,Inc. from 1995 to 1996. Member of the Board of E.I. du Pont de Nemours andCompany. Member of: The Business Council, The Business Roundtable, The U.S. -France Business Council, The U.S. - Japan Business Council. Member of the Boardof Trustees of Southern Methodist University.

Dennis M. Donovan

Board: Senior ManagementJob Title: Executive Vice President of Human ResourcesSince: 2001Age: 54Salary: $1,354,768Total Annual Compensation: $3,412,602

Mr. Donovan has been Executive Vice President - Human Resources since April2001. From October 1998 until that time he served as Senior Vice President - HumanResources of Raytheon Company, and from February 1986 until September 1998 he

Home Depot



served as Vice President - Human Resources of GE Power Systems, a division ofGeneral Electric Company.

Carol B. Tome

Board: Senior ManagementJob Title: Chief Financial Officer, Executive Vice PresidentAge: 46Salary: $954,409Total Annual Compensation: $3,029,182

Ms. Tome has been Executive Vice President and Chief Financial Officer since May2001, and prior thereto had been Senior Vice President - Finance and Accounting/Treasurer since February 2000. From 1995 until 2000, she served as Vice Presidentand Treasurer. From 1992 until 1995, when she joined The Home Depot, Ms. Tomewas Vice President and Treasurer of Riverwood International Corporation. Ms. Tomeserves as a director of United Parcel Service, Inc.

Francis S. Blake

Board: Senior ManagementJob Title: Executive Vice President - Business Development and CorporateOperationsSince: 2002Age: 53Salary: $1,726,671Total Annual Compensation: $1,779,926

Mr. Blake has been Executive Vice President - Business Development and CorporateOperations since March 2002. He was formerly the Deputy Secretary of Energy fromMay 2001 until March 2002. From June 2000 until May 2001 he was a Senior VicePresident at General Electric Company and was Vice President of GE PowerSystems, a division of General Electric Company, from February 1996 until June2000.

Robert P. DeRodes

Board: Senior ManagementJob Title: Executive Vice President - Information Technology, Chief Information OfficerSince: 2002Age: 52

Home Depot



Salary: $1,752,549Total Annual Compensation: $7,311,624

Mr. Derodes has been Executive Vice President - Information Technology and ChiefInformation Officer since February 2002. He previously served as President and ChiefExecutive Officer of Delta Technology, Inc. and Chief Information Officer for DeltaAirlines, Inc. from September 1999 until February 2002. From February 1995 untilSeptember 1999 he was Senior Vice President - Operations and Technology for DeltaTechnology, Inc. From February 1995 to September 1999, he served as SeniorTechnology Officer at Citibank for the Card Products Group.

John H. Costello

Board: Senior ManagementJob Title: Executive Vice President - Merchandising and Chief Marketing OfficerSince: 2002Age: 55

Mr. Costello has been Executive Vice President - Chief Marketing Officer sinceNovember 2002. He was previously the Advisor and Chief Global Marketing Officer forYahoo! from September 2001 until November 2002. From September 1999 untilAugust 2001 he was the Chief Executive Officer of MVP.com. He was President ofAutoNation from December 1998 until August 1999 and Senior Executive VicePresident of Sears from April 1993 until December 1998.

Frank L. Fernandez

Board: Senior ManagementJob Title: Executive Vice President, Secretary, General CounselSince: 2001Age: 52

Frank Fernandez has been Executive Vice President - Corporate Secretary & GeneralCounsel since April 2001. From 1990 until that time he was managing partner atFernandez, Burstein, Tuckzinski and Collura, P.C., in Albany, New York.

Home Depot


HOME DEPOTMajor Products And Services

MAJOR PRODUCTS AND SERVICES

Home Depot is the world’s largest home improvement retailer and the third largestretailer in the US. It offers the following home improvement products and services:

Products:- Building Materials- Cleaning Supplies- Décor- Electrical- Flooring - Garden Center- Gifts - Hardware - Heating and Cooling- Kitchen and Bath- Lighting and Fans- Paint- Plumbing- Storage - Tools - Windows and Doors

Services:- Customer Education Programs- Tool Rental

Home Depot


HOME DEPOTProducts And Services Analysis

PRODUCTS AND SERVICES ANALYSIS

For the fiscal year ended February 2004 Home Depot achieved revenues that totaled$64,816 million, an increase of 11.3% against the previous years revenues thattotaled $58,247 million.

The company’s revenues are not derived from any distinct business categories andare therefore not reported on a divisional basis.

Fiscal 2003 net sales growth was driven by an increase in comparable store sales of3.8%, sales from the 175 new stores opened during fiscal 2003 and sales from the203 new stores opened during fiscal 2002.

The increase in comparable store sales in fiscal 2003 reflects a number of factors.Comparable store sales in fiscal 2003 were positive in 10 of the 11 sellingdepartments.

The company’s lawn and garden category was the biggest driver of the increase incomparable store sales for fiscal 2003, reflecting strong sales in outdoor powerequipment, including John Deere tractors and walk-behind mowers, as well as snowthrowers and snow blowers.

Lumber was another strong category during fiscal 2003, driven primarily bycommodity price inflation.

Additionally, Home Depot had strong sales growth in its kitchen and bath categoriesand in its paint department reflecting the positive impact of new merchandisinginitiatives.

During fiscal 2003, the company added its Appliance initiative to 826 stores bringingthe total number of stores with the Appliance initiative to 1,569 as of the end of fiscal2003.

Additionally, during fiscal 2003, each store was set with the new Color SolutionsCenters, which drove sales growth in interior and exterior paint, as well as pressurewashers. Finally, comparable store sales growth in fiscal 2003 reflects the impact ofcannibalization.

The growth in net sales for fiscal 2003 reflects growth in net service revenues, whichincreased 40% to $2.8 billion in fiscal 2003 from $2.0 billion in fiscal 2002, driven bystrength in a number of areas including countertops, HVAC, kitchens and Home

Home Depot


HOME DEPOTProducts And Services Analysis

Depot’s flooring companies. The company continued to drive its services programs,which focus primarily on providing products and services to do-it-for-me customers.These programs are offered through Home Depot and EXPO Design Center stores.

Home Depot


HOME DEPOTSWOT Analysis

SWOT ANALYSIS

The Home Depot Inc. operates Home Depot stores, which are warehouse-style storesselling building materials, home improvement supplies and lawn and garden products,primarily to do-it-yourselfers. In addition, the company operates EXPO Design Centerstores, which offer products and services primarily related to design and renovationprojects; Home Depot Landscape Supply stores, which service landscapeprofessionals and garden enthusiasts with lawn, landscape and garden products, andHome Depot Supply stores serving primarily professional customers. At the end of thefiscal year ended February 1, 2004 the company was operating 1,707 stores in total inthe United States, Canada and Mexico.

Strengths

Large, diverse and growing retailer

The Home Depot, Inc. is the world’s largest home improvement retailer and thesecond largest retailer in the United States, based on net sales for the fiscal yearended February 2004 (fiscal 2003) which were $64,816 million. At the end of fiscal2003, the company were operating 1,707 stores. Most of the company’s stores areeither Home Depot stores or EXPO Design Center stores.

In addition to Home Depot and EXPO Design Center stores, the company also hastwo store formats focused on the professional customer called The Home Depot

Strengths WeaknessesLarge, diverse and growing retailer

Business model

Distinctive product range

New capex priorities

New store productivity remains weak

Rising expenses

Store layout and appearance

Opportunities ThreatsGrowth in global sourcing

Payback from IT investment

North American growth potential remains

International expansion

Competitive factors

Overlap between Home Depot and Lowes

Industry slowdown

Home Depot



Supply store and Home Depot Landscape Supply. At the end of fiscal 2003, HomeDepot was operating five Home Depot Supply stores and 11 Home Depot LandscapeSupply stores. The company also has two stores located in Texas and Florida calledThe Home Depot Floor Store that sell primarily flooring products. The companycurrently plans to open a total of 175 stores during fiscal 2004, including Home Depotstores and other formats.

Business model

The operating strategy of Home Depot is to offer a broad assortment of high-qualitymerchandise and services at competitive prices using highly knowledgeable, service-oriented personnel and strong marketing and credit promotions. Also the company’sassociates’ knowledge of products and home improvement techniques andapplications is very important to its marketing approach and the ability to maintaincustomer satisfaction. Home Depot regularly checks competitors’ prices to ensurethat its prices are competitive within each market. This model has proved to besuccessful considering the company’s consistent year-on-year revenue growth.

Distinctive product range

A typical Home Depot store stocks approximately 40,000 to 50,000 products duringthe year, including both national brand name and proprietary items. To complementand enhance its product selection, the company has strategic alliances and exclusiverelationships with certain suppliers to market products under a variety of well-recognized brand names. At the end of fiscal year 2003, Home Depot offered anumber of proprietary and exclusive brands across a wide range of departmentsincluding, but not limited to, John Deere lawn and garden tractors; Thomasvillekitchen and bathroom cabinets; Silestone countertops; RIDGID power tools; BehrPremium Plus paint; Mill’s Pride cabinets; Husky hand tools; GE SmartWater waterheaters; Philips light bulbs; Toro lawn mowers; Vigoro lawn care products; GAFroofing products; Honda lawn mowers and Lithonia Lighting fluorescent lightingproducts.

New capex priorities

The most important changes to Home Depot’s investment themes surround its newcapital expenditure priorities. First, cap-ex will grow 3% in 2004 compared to 31% in2003 - a signal that management recognizes the importance of not over investing in amaturing business. Second, approximately 43% of the 2004 capex budget will beearmarked for remodeling older stores and upgrading IT systems. This compares with33% in the previous year. In fact, Home Depot plans to remodel all stores within the

Home Depot



next three years with either new paint and signage, or full-scale gut and renovateremodels. The other significant shift in Home Depot’s capital expenditure program is areduction in new store development. Commitments that should enhance HomeDepot’s competitive position.

Weaknesses

New store productivity remains weak

Weak new store productivity reflects Home Depot’s diminishing real estateopportunities, as the company is beginning to face issues with saturation. New storeproductivity declined to an estimated 70% in FY03 versus 76% in. This is in contrastwith strong new store productivity for Lowes, which is expected to achieve new storeproductivity of 80% in FY03, driven by continued expansion into higher-volume metromarkets.

Rising expenses

Home Depot has experienced five consecutive years of rising expenses (as apercentage of revenue), similar to other competitors. However, Home Depot’sexpense ratio has increased at a faster pace, rising an estimated 120 basis pointsfrom FY99 to FY03, compared with a 60 basis point increase for Lowes. This hasdriven a narrowing in the gap between the two companies in favor of Lowes. It isestimated that Lowes expenses per foot are still as much as 19% lower than HomeDepot’s at approximately $63 versus $78.

Store layout and appearance

Home Depot is often criticized for the inconsistencies in the company’s store layoutand appearance. This has led to customer dissatisfaction with the company, andnegative publicity. The company’s new stores employ modern initiatives, while itsolder stores do not. Competitors such as Lowe’s appear more effective at upgradingold stores with new merchandising initiatives and techniques, therefore Home Depotshould look to use Lowe’s as an example to upgrade its older stores.

Opportunities

Growth in global sourcing

A growing mix of imports will lead to further gross margin expansion. Home Depotcurrently imports 8% of its purchase while Castorama, a UK competitor importsapproximately 20% of its merchandise. Importantly, it is estimated that gross margins

Home Depot



on direct imports are as much as 1,000 basis points higher than the current companyaverage. Further, Home Depot’s private label goods also carry above average margin,and will represent a growing portion of the business.

Payback from IT investment

Home Depot has increased its capex budget for technology tenfold over the last threeyears to $360 million in fiscal 2003 from $30 million in fiscal 2000. Accordingly, thecompany is now well positioned to reap payback from these investments. Thecompany is also pursuing a number of new technology projects that could improveunit level efficiency, thereby enhancing potential customer service levels, as well asrevenues per payroll hour.

Home Depot could experience higher and more competitive sales growth, driven bybetter customer service and in-stock positions. Already, Home Depot is redeployinglabor to the selling floor as it achieves efficiency gains at the front and back ends of itsstores. The company could also raise its gross through new assortment planning,pricing optimization and markdown management tools that could reduce the numberand extent of markdowns. Further RTV and new POS software and terminals couldimprove cashier accuracy and reduce the incidence of fraud, thereby driving lowershrink rates.

North American growth potential remains

Home Depot has better growth prospects in North America. Home Depot’s strategiesfor extending and expanding its business are consistent with this view. Key growthinitiatives include Home Depot’s pro-initiative, special order sales, At Home Servicesand Builder Solutions Group. These businesses continue to be delivering above-average sales growth and gross margin.

International expansion

The Home Depot is also spreading its wings further a field to avoid losses whichwould occur from containing its business in one market. It has entered the Mexicanmarket, a $12.5 billion home improvement market opportunity. At the end of 2003, thecompany had established 18 stores and is now the largest home improvement retailerin Mexico. It has also continued profitable growth through its 102 Home Depot storesin Canada, 13 of which opened during 2003. In July 2004 the company alsoannounced its intentions to enter the Chinese market, one of the largest and fastestgrowing markets in the world.

Home Depot



Threats

Competitive factors

Home Depot’s business is highly competitive, based in part on price, store location,customer service and depth of merchandise. In each of the markets that it serves,there are a number of other home improvement stores, electrical, plumbing andbuilding materials supply houses and lumber yards. With respect to some products,the company also competes with discount stores, local, regional and nationalhardware stores, mail order firms, warehouse clubs, independent building supplystores and, to a lesser extent, other retailers.

In addition to these entities, the company’s EXPO Design Center stores also competewith specialty design stores or showrooms, some of which are only open to interiordesign professionals. Due to the variety of competition Home Depot faces, it is unableto precisely measure the impact on sales competitors have. The company estimatesthat its share of the U.S. home improvement industry is approximately 11% and thecompany believes it is an effective and significant competitor.

Overlap between Home Depot and Lowes

Rising store overlap between Home Depot and Lowes is another key concern,particularly as Lowes increasingly penetrates top-25 markets -Home Depot’s mostprofitable stores.

55% of Lowes locations are within 5-miles of a Home Depot store, while 42% of HomeDepot’s stores are within 5-miles of Lowes figure which are more acute in the top-25markets. In these cities, 75% of Lowes stores overlap with Home Depot, but only 36%of Home Depot’s stores overlap with Lowes. This overlap should continue to grow asLowes enters Home Depot’s incumbent markets. Importantly, it is not uncommon forHome Depot’s sales to decline up to 15% when faced with a nearby entrance fromLowes.

Industry slowdown

The company’s decision to slow store growth to 10% highlights Home Depot as amature growth story. Accordingly, this has once again raised concerns about industrysaturation. These concerns are augmented by Home Depot’s limited success withalternative growth platforms, like EXPO.

The U.S. home center potential is valued at approximately 3,500 stores. With HomeDepot and Lowes opening a combined 300 stores a year in the U.S., it is anticipated

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that the industry could reach saturation within the next four years. Importantly, HomeDepot’s weak new store productivity is an early indicator that the company is facingsaturation.

Home Depot


HOME DEPOTTop Competitors

TOP COMPETITORS

The following companies are the major competitors of Home Depot:

84 Lumber CompanyAmazon.com, Inc.Best Buy Co, Inc.Builder Marts of America, Inc.Builders FirstSourceBig Lots, Inc.Costco Wholesale CorporationKmart CorporationLanoga CorporationP.C. Richard & SonSears, Roebuck and Co.TruServ CorporationWolseley plcAce HardwareBuilding Materials Holding CorporationFastenal CompanyCanadian Tire CorpSears CanadaLowe’s Companies IncMenards IncTrue Value CompanyPrimus, Inc.Tractor Supply Company

Home Depot


HOME DEPOTCompany View

COMPANY VIEW

A statement by Bob Nardelli, chairman, president and CEO of Home Depot, follows.This statement has been taken from the company’s 2004 Annual Report:Looking back at 2004, our strong performance was the result of focusing on our corepurpose: Improve Everything We Touch. This core purpose, which we shared with ourassociates at our 25th anniversary celebration last summer, captures both who we areas a company and how we came together as a team in 2004 to build on our proudpast and create an even brighter future.

Driven by our core purpose, we focused on the execution of our unwavering strategyto enhance the core, extend the business and expand our markets. As a result, wedelivered record financial performance, with sales growth of 12.8% to $73 billion. Toput that into perspective, from 2000 to 2004, we have grown our top line sales bymorethan $27 billion, roughly the sales of a company ranking among the top 60 in theFortune 500. Earnings per diluted share grew 20.2% to $2.26 in 2004. Average ticketreached $54.89, gross margin climbed to 33.4% and operatingmargin increased to 10.8% all company records. We also drove comparable storesales of 5.4%, our best comparable store sales performance since 1999.

At the same time, we maintained one of the strongest balance sheets in retail, endingthe year with shareholders’ equity of $24 billion; $39 billion in assets, including $2.2billion in cash and short-term investments; and a debt-to-equity ratio of 8.9%.

We had a great year when measured across virtually every key metric. Ouroutstanding financial performance allowed us to continue reinvesting in our businessand return approximately $4 billion of cash to our shareholders last year throughshare repurchases and dividends. Over the past four years, total share repurchasesand dividends returned to shareholders equated to $3.90 per diluted share, orapproximately 56% of our cumulative earnings.

I could not be more proud of what our 325,000 associates achieved from both anoperational and a financial perspective. In 2004, we accomplished something evenmore meaningful: building a foundation for continued growth and profitability well intothe future.

Enhancing the CoreIn 2004, we continued our focus to improve the customer experience in our stores byinvesting approximately $1 billion in store remodels and refreshes.

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At the center of these efforts were continued performance improvements from majormerchandising resets in core areas such as lighting, flooring, kitchen and appliances,to name a few. We also launched a steady stream of innovative and distinctive newproducts that received a record number of accolades from leading consumerpublications. We continued to use technology, installing human resource and financialsystems, to improve our operating systems and enable future growth. And, in all U.S.stores, we completed our installation of POS systems, which allowed us to roll outcordless scan guns to all stores and have over 1,000 selfcheckout systems in place.These technologies shorten checkout times and enhance the customer experience.

We invested heavily not only in our physical assets, but also in our associates,through more than 23 million hours in learning, which helped our associates deliverbetter customer service. We enhanced our compensation and rewards programs withrecord Success Sharing payouts of approximately $90 million. We launched excitingnew hiring partnerships with AARP and the Departments of Defense, Veterans Affairsand Labor, and we added new benefits programs that are available to full- and part-time associates, making us an employment practices leader in theretail industry.

Extending the BusinessWe opened 183 net new stores, including several new and exciting store formats inManhattan, New York and Park Royal, West Vancouver. These stunning new urbanformats represent the best of The Home Depot when it comes to innovation in design,merchandising, product selection and service delivery, and have opened up futurerevenue opportunities for The Home Depot.

Driven by our core purpose, we focused on the execution of our unwavering strategyto enhance the core, extend the business and expand our markets. As a result, wedelivered record financial performance, with sales growth of 12.8% to $73 billion. Toput that into perspective, from 2000 to 2004, we have grown our top line sales bymorethan $27 billion, roughly the sales of a company ranking among the top 60 in theFortune 500.

We also continued to focus on services, with 23 national programs handling morethan 11,000 installations per weekday. Our services revenue increased by 28% in2004. Responding to the growing demand for online shopping, we revamped ourhomedepot.com site, making dramatic improvements in the overall navigability of thesite with more than 15,000 product SKUs for sale online, including appliances. All ofthese extensions to our business are proof positive that our market-back customer

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approach is allowing us to successfully offer the right products and services to meetthe changing needs of our diverse customer base.

Expanding the MarketWe also made several important moves to expand our global market presence. Withthe acquisition of Home Mart in Mexico, we have become the largest homeimprovement retailer in that market in less than three years with 44 stores at year-end.In Canada, we celebrated our 10-year anniversary in 2004 and opened 15 stores,bringing our total there to 117. We also announced plans to expand our presence inChina, capitalizing on our learning from our two merchandising offices, to enter theretail sector in this rapidly growing market.

We made several important acquisitions within the professional customer market:most notably White Cap Construction Supply, in June 2004, a leading professionaldistribution business; Creative Touch Interiors, in January 2004, a leading nationaldesign center partner for production homebuilders, which is now part of The HomeDepot Supply, Builder Solutions; and Litemor, in February 2005, Canada’s largestnational commercial lighting distributor.These acquisitions give us strong entry points into the $400+ billion professionalmarket. We intend to continue growing in the market both organically and throughfuture acquisitions.

Improve Everything We TouchWe celebrated our 25th anniversary in 2004 and used this year to reaffirm the valuesthat have made this company so special. We rejuvenated our Team Depot volunteerprogram by creating our first annual Week of Service, contributing more than 260,000volunteer hours in just seven days through more than 1,600 projects in ourcommunities.

That same spirit of giving back and supporting our communities vividly came to life asfour hurricanes struck the Southeastern U.S., and The Home Depot mobilized todeliver the largest relief and resupply effort in our company’s history. In total, wedonated more than $4 million in contributions to rebuilding efforts throughout theimpacted areas. We also stepped up and recommitted to our troops serving overseas,with a $1 million tool donation to support their rebuilding efforts in Iraq.

Finally, we witnessed our own Olympic Job Opportunity Program associates pursuetheir dreams of winning as they participated in the Olympics and Paralympics inAthens, Greece, bringing homea record 41 medals.

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These and other efforts reflecting our values earned us prestigious recognition,including the 2004 Citizenship in Action Award from the U.S. Chamber of Commerceand the Freedom Award from the U.S. Department of Defense.

2005: A Turning PointWe have built an impressive track record of performance and success over the pastseveral years and have a tremendous amount of momentum as we move into 2005.

Capitalizing on that momentum will require continued discipline and focus onexecution. As we open 175 new stores in 2005 and continue to invest in themodernization of our stores, it is customer satisfaction, customer conversion andaverage ticket that will be key to driving growth in our core retail business. Withapproximately 1.3 billion customer transactions a year, even slight improvements inthese key metrics can drive exponential gains in our financial performance. At thesame time, we will stay focused on developing multiple platforms for sustainable,profitable growth in exciting new customer markets, product and service categories,and new geographies.

2005 is a turning point in our history: a year to build on our strong momentum andproven strategy, to continue to execute on our plan and to continually improve thecustomer shopping experience. This is a company with a proud past and increasinglybright future and we recognize that our associates are our competitive advantage. Inthe four years I have been here, our 325,000 orange-blooded associates have provento me time and again that when we set our minds on something, we always get it donethe right way and that is exactly what we intend to do in 2005.

Thank you for your continued support, which was instrumental in helping us deliver onour core purpose to Improve Everything We Touch in 2004. I hope you are as excitedas I am about theopportunities that lie ahead for our great company.

Home Depot


HOME DEPOTLocations and Subsidiaries

LOCATIONS AND SUBSIDIARIES

Head Office

Home Depot2455 Paces Ferry RoadAtlantaGA 30339 4024United StatesP: 1 770 433 8211F: 1 770 384 2356www.homedepot.com

Other Locations and Subsidiaries

Expo Design CentersEXPO-Queens73-01 25th AvenueEast ElmhurstNY 11370United StatesP: 1 718 533 4600

The Home Depot Special Order CenterUnited States

Maintenance Warehouse10641 Scripps Summit CourtSan DiegoCA 92131United StatesP: 1 800 431 3000www.mwh.com

Georgia Lighting530 14th StreetGeorgiaGA 30318 5418United StatesP: 1 404 875 4754F: 1 404 872 4861www.georgialighting.com

Apex Supply CompanyPO Box 565427DallasTX 75356 5427United StatesP: 1 214 741 5463F: 1 214 744 4193www.apexsupplyco.com

Home Depot USA IncSouth Chase13121 S Orange BlossomOrlandoFL 32837United StatesP: 1 407 240 2491

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HOME DEPOTLocations and Subsidiaries

Home Depot of Canada IncNepean1900 Baseline RoadOttawaOntarioCanadaP: 1 613 723 5900

HD Development of Maryland IncUnited States

White Cap Construction Supply, Inc3120 Airway AveCosta MesaCA 92626United StatesP: 1 714 850 0900F: 1 714 557 8468www.whitecapdirect.com

Floors, Inc1775 Brightseat RdLandoverMD 20785 3787United KingdomP: 1 301 772 5800F: 1 301 772 1170www.floors-inc.com

Home Depot Landscape Supply2560 Satellite Blvd.DuluthGA 30096United StatesP: 1-866-589-0561

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Documents

Home Depot Profile