HOMEDEPOT,INCintheNewMillenium

7/28/2019 HOMEDEPOT,INCintheNewMillenium

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HOME DEPOT, INC.

in the New Millennium

Tom Thomson, Suzanne Ma, Todd Humphrey, Owen ClementsJune 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 knowledgeablecustomer service representatives

Between the Fall of 1981 & End of 1999, stockprice had risen at a compound annual rate of29%

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 anattempt to copy Home Depots warehouse styleretail 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 andCanadian provinces 2/3rd of stores opened

in existing markets


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Current Situation

October 12th, 2000 the company announcedlower then expected earnings for the 3rd and 4thquarter

Largest one day drop (28%) to $35, a $33 billionloss 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 countrieshad a GDP in 2004 less than $33 billion

according to the world bank?2/3

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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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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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Large Market potential

Job Lot quantities

Different needs for different customers

Effect of professional customers on DIY

Anticipated to influence sales the most outof all of the initiatives

More cyclical then DIY business


Professional Customers


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Extending into specialty shops

Very high end product range

Required retainer fee

Sales goal for each customer ($10,000)

Investigating smaller stores to competemore directly with Home Hardware etc.


Store Formats


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Product Categories Increasing product lines

Adding appliances to complement current

offerings

Vertically integrate supply chain

Tool rentals and truck rentals


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International Growth Expansion into South America

Joint venture in Chile

Looking into expansion into the Far East


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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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Excellent opportunity!

Service will be key for this segment


Buy-it-Yourself Customers


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Professional CustomersAnother opportunity!

Largest and most profitable market

Complement to the existing business


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Store Formats Bad idea!

Different business plan

Doesnt fit well with current strategy and

business plan


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Product Categories Great idea!

One stop shopping is the N. American way

Why deliver when you can charge thecustomer to do it themselves?


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International Growth Bad idea!

Risky, risky, risky

Saturate N. American market first

Joint venture was the best method forentering this market


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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

Ratios 2000 1999 1998

Return on Equity 26.50% 22.70% 19.50%

Return on Assets 22.60% 19.70% 17.40%

Cash Flow

Cash Flow from Operating Activities 2446 1917 1029

Cash Flows from Investing Activities -2622 -2271 -971

Cash Flows from Financing Activities 281 248 -32

Cash and Equivalents EOY 168 62 172


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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 @6%.

Equates to sales growth @29%


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What Will Be The Stock Price?

OPTIMISTIC: 26% @ 7% NOPAT

Continued growth with Do It YourselfBusiness. Expand stores. Expandcategories.

40% growth in Buy It YourselfCustomers.

At least 25% growth with ProfessionalCustomers. Large opportunity, highmargin.

Stock Price= $60-$62


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PESSIMISTIC: 5% @ 6% NOPAT

Some continued growth with Do ItYourself Business via store expansions& bundling.

Moderate success in Buy it YourselfCustomers.

Difficult to cross over with theProfessional Customer base.

Stock Price= $11


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MOST LIKELY: 15% @ 6% NOPAT

Some success with in Buy it YourselfCustomers. 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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OTHER FACTORS

Even with all the right initiatives futureremains questionable.

History: Very few companies cansustain HDs level of performance overa 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 growthpredictions by ~50%


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And more

May 2003 6% increase in sales

Revert away from warehouse style stores

Centralized shippingContinue to expect 18-20 % growth


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Questions?

Documents

HOMEDEPOT,INCintheNewMillenium