Home Depot 2005

1
2005
A Strategic Management Case Study
2
Overview

• A brief history of The Home Depot
• EOY 2004
• Mission, Vision, Objectives, Strategies
• 2005
• New Vision and Mission
• External Analysis
• Opportunities Threats
• CPM
• EFE
• Internal Analysis
• Financial Data
• Strengths and weaknesses
• IFE
• Financial ratios
• Strategic Analysis
• SWOT Matrix
• SPACE
• BCG
• IE matrix

• Possible alternative strategies
• Our Recommendation
• Strategies
• Long range objectives
• EPS/EBIT
• Implementation Issues
• Proposed annual objectives (goal) and polices
• Proposed procedures for evaluation
• Epilogue
• Current Performance
• Resources Utilized
• Questions

3
History of the Home Depot

• 1978 Founded by Bernie Marcus and Arthur Blank
  zero locations 20 associates
• 1979 3 store location 200 associates 7 million
  in sales
• 1980 4 stores 300 associates 22 million in
  sales
• 1981 Stock goes public on NASDAQ, raising 4.1
  million 8 stores 700 associates 51 Million
  in sales
• 1984 Moved to the New York Stock Exchange (NYSE)
  in
• 1986 Sales exceed 1 billion 60 stores
• 1987 Day-in/Day-out pricing policy UPC scanning
  system health program for associates
  introduced 75 stores 1.45 billion sales
• 1988 Named retailer of the Year by Building
  Supply Home centers for second time named High
  Performance Retailer for 7th consecutive year by
  Management Horizons 96 stores 2 billion in
  sales

4
History of the Home Depot

• 1994 The company arrived in Canada with the
  acquisition of Aikenheads home improvement
  centers
• 1997 624 stores 124,000 associates 24.2
  billion sales
• 1999 The Legend opened in the Atlanta Store
  Support Center chronicles the history of The
  Home Depot and illustrates the values that set us
  apart
• 2001 Began flying its flag proudly in Mexico in
  2001 through the acquisition of Total HOME
• 2002 1,532 stores 300,000 associates 58.3
  billion in sales
• 2003 64.8 billion in sales
• 2004 Sales reach 73.1 billion over 1,818 stores
  and 54 EXPO centers making Home Depot the
  worlds largest home improvement retailer, 2nd
  largest retailer in the United States, 3rd
  largest retailer in the world

5
2004 Mission

• The Home Depot is in the home improvement
  business and our
• goal is to provide the highest level of service,
  the broadest
• selection of products and the most competitive
  prices. We are a
• values-driven company and our eight core values
  include the
• following
• Excellent customer service
• Taking care of our people
• Giving back
• Doing the "right" thing
• Creating shareholder value
• Respect for all people
• Entrepreneurial spirit
• Building strong relationships

6
Giving Back
In 2004 Home Depot committed to its first ever
week of service. 260,000 volunteers hours were
donated by 34,500 associates. Completing 1,600
service projects. Due to its success we have
decided to make it an annual event.
7
2004 Strategies and objectives

• Approximately 1 billion is being invested in
  infrastructure
• Self check out computers
• Product scanning devices
• 175 new stores in North America
• Modernize current stores

8
2004 Issues

• Strong competition with Lowes is driving down
  prices
• Contractor shortages causing a backlog in home
  remodeling
• A class-action lawsuit alleges that Home Depot
  and rival Lowe's misled customers with
  interest-deferred credit card promotions in 2003

9
Exclusive Brands

• The Home Depot carries several exclusive brands,
  including
• BEHR Paint
• Chem-Dry (carpet cleaning, upholstery cleaning,
  tile and grout services)
• Distinctions Cabinetry
• Eco Options (store brand)
• Feather River Doors
• G.E. (Water Heaters)
• Glacier Bay (faucets and bath)
• Hampton Bay (lighting, ceiling fans patio
  furniture)
• Husky (tools)
• Millstead
• Pegasus (kitchen and bath items)
• Ralph Lauren paint
• Ryobi (power tools)
• Thomasville cabinetry
• Vigoro (fertilizer)
• Workforce

10
Creating a worldwide presence
Add the end of 2004 we had 44 stores in Mexico
and 117 in Canada
11
A New Vision

• To be the first choice for affordable,
• diverse, innovative, and modern products in
• the home improvement industry.

12
A New Mission

• The Home Depots mission is to be a superior
  retailer in the home improvement business by
  providing an extensive range of products
  worldwide. (2,3,7) We offer first-rate customer
  service to all home owners and businesses, from
  housewives to contractors. (1) The Home Depot
  values its relationship with its employees,
  shareholders, customers, and the community as
  well as the environment and maintains a high
  level of respect for all. (6,8,9) These
  relationships are maintained through vast
  community involvement and a dedication to
  increasing our presence internationally, thereby
  providing to those in need and increasing profits
  to our shareholders. (4, 6,5) We utilize
  technological advancements to assist in our
  growth and further develop our innovated stores.
  (4)

13
The Home Depots mission

• The new mission answers the following questions
• Customers Who are the firms customers?
• Products or services What are the firms major
  products?
• Markets Geographically, where does the firm
  compete?
• Technology Is the firm technologically current?
• Concern for survival, growth, and profitability
  Is the firm committed to growth and financial
  soundness?
• Philosophy What are the basic beliefs, values,
  aspirations, and ethical priorities of the firm?
• Self-concept What is the firms distinctive
  competence or major competitive advantage?
• Concern for public image Is the firm responsive
  to social, community, and environmental concerns?
• Concern for employees Are employees a valuable
  asset of the firm?

14
External Audit Opportunities

• International expansion
• Consumer interest in one-stop shopping to save
  time and gas money
• Growth in global sourcing
• Hardware stores, home centers, and
  retail-oriented lumberyards, industry expected to
  grow (from 236.3 billion in 2004 to 281.7
  billion by 2008)
• Slow housing sales (people are likely to stay
  home and spend money on remodeling and on
  improvements to make a home more attractive to
  purchase)
• The growing number of woman who are making home
  improvement decisions and spending an increasing
  amount of time on DIY (do-it-yourself) projects

15
External Audit Threats

• Competitors (Lowe's, Sears, Wal-Mart)
• Reaching market saturation within North America
• Contractor shortage causing backlog in home
  remodeling
• Overlap between Home Depot and Lowe's
• A class-action lawsuit alleges that Home Depot
  and rival Lowe's misled customers with
  interest-deferred credit card promotions in 2003

16
The Home Depot CPM
17
The Home Depot EFE
18
Consolidated Balance Sheet
19
Consolidated Balance Sheet
20
Consolidated Statement of cash flows
21
Internal Audit Strengths

• 1 home improvement retailer in the world
• 2 retailer in the U.S.
• Profits climbed 16 and revenues climbed 13 in
  for the fiscal year 2004
• Innovative methods of differentiating
• Dominant in the lumber and building materials
  industry
• Distinctive product range
• Efficient business model

22
Internal Audit Weaknesses

• Rising expenses
• Store layout and appearance
• New store productivity remains weak
• Revenue growth is slower than industry average
  and Lowe's
• 18 decrease in cash and cash equivalents FY from
  2002 and 2003 to 2004

23
The Home Depot IFE
24
Financial Ratio Analysis
25
Financial Ratio Analysis
26
Financial Ratio Analysis
27
Financial Trends(January 1999-January 2005)
Financial data in U.S. dollars Industry Home
Improvement Stores
28
The Home depot stock Performance
Source moneycentral.msn.com Dividends ( )
Splits ( )
29
The Home depot Net Worth (January 2005, in
Millions of U.S. Dollars Except Per Share items)
Stock price is based on a closing price at
1/28/2005 from finance.yahoo.com
30
Strategic Analysis SWOT Matrix
31
Strategic Analysis Space Matrix
32
Strategic Analysis Space Matrix
Home Depot has achieved moderate competitive
advantages and financial strength in a growing
and stable industry.
33
Strategic Analysis Grand Strategy Matrix
34
Strategic Analysis IE Matrix
35
Strategic Analysis BCG Matrix
36
Matrix Analysis
37
The Home Depot QSPM
38
The Home Depot QSPM
Key Internal Factors
39
Possible Alternative Strategies

• Forward integration As a retail outlet, Home
  Depot can acquire major distributors of plumbing
  equipment, construction equipment, and other Home
  Depot product related distributors.
• Backward Integration As a retail outlet, Home
  Depot can acquire its major suppliers of Home
  Depot supplies such as installation services,
  steel mills, and logging companies of their own
  thus creating a supply that suits their quality,
  and amount that they need.
• Horizontal integration Home Depot can acquire
  other home improvement companies taking greater
  control of the industry, and gaining more control
  in various regions.

40
Possible Alternative Strategies

• Market Development Home Depot mainly targets
  self builder construction companies and baby
  boomers. Home Depot can develop a market for
  newly weds, and new home owners who may want to
  improve their newly purchased home.
• Market Penetration Go after Lowes, Ace Hardware
  and True Values market share

41
Recommendations

• Strategy 1
• Domestic Expansion
• Open up more full service hardware stores
  throughout the united states
• thus creating a presence in all areas within a
  state. Goal would be to have
• at least 5 Home Depots per state, averaging 10
  new stores per quarter. This
• will make Home Depot a one stop shop for
  individual customers and
• businesses alike.
• Estimated cost of such an expansion
• 4 million per store
• 10 stores 40 Million

42
Recommendations

• Strategy 2
• International Expansion
• Acquire European home improvement company
  Kingfisher plc.
• By acquiring this company, we will create a
  presence in Europe. This
• will also give us presence and possession of
  companies that are part of the
• Kingfisher group such as BG (UK Ireland China
  Taiwan and Hong
• Kong), Brico Depot (France and Spain), Castorama
  (France Italy Poland
• and Russia) Hombach Holding AG (21 Kingfisher
  stake), KOCTAS
• (Turkey, and Screwfix Direct Ltd (England).
• Estimated cost for such an acquisition 10
  Billion
•  

43
Recommendations

• Strategy 3
• Provide fuel services
• Aside from being a home improvement store, Home
  Depot will have filling
• stations at select Home Depot stores. This will
  create a one stop shop for
• customers, and businesses providing fuel, food,
  and other quick stop
• necessities.
• Estimated cost 8 million
•  

44
EPS/EBIT
45
EPS/EBIT
46
Implementation Issues

• Importing goods overseas
• Dealing with changes in supply chain with
  distributors
• Dealing with new cultures
• Customers
• Employees
• Environmental issues and regulations
• Hostile takeover
• Hesitancy of KingFisher to sell

47
Proposed Annual Objectives (goal) and Policies

• Increase sales revenues by 20 annually for the
  next 3 years
• Reduce expenses by 20 annually for the next 3
  years
• by 10 in selling and store operating costs
• by 10 in general and administrative costs
• New capital expenditure priorities not over
  investing in a maturing business
• 90 reduction in a new store development in
  domestic
• 40 increase in remodeling older stores and
  upgrading IT systems
• 50 increase in international expansion

48
Proposed Procedures For Evaluation

• Track competitors price changes
• Company ranking
• SAP Top 100 retailers
• Business Week
• Fortune
• Quarterly financial reports
• Quarterly meetings to evaluate current plan and
  respond as necessary to changes

49
Epilogue

• 2005 launches its high-end online
  home-furnishings store, 10 Crescent Lane,
  shortly followed by the launch of Paces Trading
  Company, its high-end online lighting store.
• 2005 Former employee Michael Davis filed a
  whistleblower lawsuit against the Home Depot,
  alleging that his discharge was in retaliation
  for refusing to make unwarranted charge backs
  against vendors.
• 2006 the Home Depot acquired Home Decorators
  Collection which was placed as an additional
  brand under its Home Depot Direct Division
  Sales totaled US90.8 billion 10 increase in
  revenue
• 2006 Started testing with fuel centers at some of
  its stores. The first centers are expected to
  earn 5-7 million per year. The fuel centers
  sell beer, hot food, snacks along with providing
  diesel at a separate island. This allows
  contractors with large trucks to be able to fill
  their vehicles. The fuel centers also offer car
  washes, which are large enough to accommodate
  full size pickups.
• 2007 Nardelli (CEO) was replaced by Frank Blake
  sold its wholesale division HD Supply to a
  consortium of 3 private equity firms

50
Current Stock Performance
51
Resources

• MSN Money
• CNN Money
• Almanac Business and Industry Financial Ratios
  2008
• Edgar Online
• www.homedepot.com

52
Questions

• ?