Case 12 The Home Depot Dan Phillips, Bo Young Hwang, Sarah Sheets, Tristan Longstreth Arizona State University Introduction The succession of CEOs, presidents, and board of directors provides a challenge for businesses as they reform, reposition, and restructure. Although these successions may provide a company with beneficial results, many experience hardship. Top company officials leave due to a variety of reasons, but a common reason is conflict with employees related to executive leadership style and the culture it creates. Robert Nardelli, former CEO of Home Depot Inc., resigned in January 2007. Numerous factors led to Nardelli’s resignation: Shareholders experienced dissatisfaction with the performance of Home Depot’s stagnating stock prices; Nardelli’s militaristic leadership style and centralized organizational structure affected the performance of employees resulting in excessive layoffs; and the expansion of retail stores became unmanageable. The once successful and highly valued Home Depot culture had changed, affecting Home Depot’s sales and customer loyalty. Along with the change in Home Depot’s business culture, it faced challenges associated with the dramatic boom and fall in the housing market. These problems affected Home Depot’s employee morale, stockholders, and customers. CEO successor Frank Blake has much to address in order to reposition Home Depot as the industry giant it has been for 20 years. © Don Hammond/Design Pics/Corbis History Bernie Marcus and Arthur Blank cofounded Home Depot on June 29, 1978, after being fired from Handy Dan, a small chain of home improvement stores. Their vision was to offer “warehouse stores filled from floor to ceiling with a wide assortment of products at the lowest prices” along with superior customer service provided by a knowledgeable staff.1 This vision became a reality after acquiring sufficient capital from a New York investment banker. They opened two Home Depot stores on June 22, 1979, in the company headquarters, Atlanta, Georgia. Home Depot grew rapidly in a short period of time and went public in 1981. In 1986 Home Depot broke the $1 billion mark in sales with 50 stores that expanded into eight markets. Home Depot revolutionized the home improvement industry by offering a wide selection of merchandise, low prices, and superior customer service to both the professional contractor as well as the do-it-yourself patron. In-store inventory contains premium products imported from more than 40 countries, including 40,000–50,000 different types of building materials, home improvement supplies, and lawn and garden products. An additional 250,000 products are available upon special order. In addition, merchandise is localized throughout each store to match the area’s specific market needs. Today Home Depot is the largest home improvement retailer in the world.2 The 2,100 stores located throughout the United States, Canada, China, and Mexico employ roughly 335,000 people. Home Depot also operates 34 EXPO design centers, 11 landscape supply stores, and two floor stores.3 In addition, Home Depot has become one of the leading diversified wholesale distributors in the United States due to its former HD Supply division. HD Supply Centers caters to the professional contractor for home improvement and municipal infrastructures with nearly 1,000 locations in the United States and Canada.4 Marcus and Blank implemented a decentralized structure with an entrepreneurial style of management, which consisted of a laid-back organization known for The authors would like to thank Professor Robert E. Hoskisson for his support under whose direction the case was developed. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The case solely provides material for class discussion. This case was developed with contributions from Kevin Holmberg. 153 Case 12 • The Home Depot 154 the independence of its store managers.5 Over time the changes in leadership, structure, and management style diverged from what the originators intended. Strategic Leaders Robert L. Nardelli acted as president, CEO, and chairperson of the board from December 2000 until January of 2007. Nardelli received his BS in business from Western Illinois University and earned his MBA from University of Louisville. Nardelli joined General Electric in 1971 as an entry-level manufacturing engineer and by 1995 became president and CEO of GE Power Systems. After leaving GE he was quickly hired as CEO of Home Depot despite the fact that he lacked any retail experience. From GE he brought a new management strategy based on Six Sigma to Home Depot. Using Six Sigma principles he centralized the management structure of the company by eliminating and consolidating division executives, he initiated processes and streamlined operations, such as the computerized automated inventory system, and centralized supply orders at the Atlanta headquarters. He took the focus off the retail stores, moving beyond the core U.S. big-box business to conquer new markets by building up its Home Depot Supply division, and expanded into China.6 Under Nardelli, Home Depot’s sales over a five-year period went from $45.7 in 2000 to $81.5 billion in 2005,7 and stock prices stagnated during Nardelli’s six-year reign at just over $40 per share.8 The weak financial profits and his results-driven management style, which allegedly affected the cherished culture of the company, led to a backlash and push for his resignation in January 2007. Frank Blake succeeded Nardelli as chair and CEO of Home Depot in January of 2007. He earned his bachelor’s degree from Harvard College and a jurisprudence degree from Columbia Law School. Blake originally joined the company in 2002 as executive vice president of Business Development and Corporate Operations.9 His responsibilities included real estate, store construction and maintenance, credit services, strategic business development, special orders and service improvement, call centers, and installation services business. Prior to this role, Blake was deputy secretary for the U.S. Department of Energy and also a former GE executive. Blake also has public sector experience, serving as general counsel for the U.S. Environmental Protection Agency, deputy counsel to Vice President George Bush, and as a law clerk to Justice Stevens of the U.S. Supreme Court.10 As Home Depot’s new leader, Blake faces significant challenges, especially when it comes to rising above competition. Competition Competition fuels businesses to be efficient in almost every way. Competition forces companies to control their costs, develop new products, and stay at the forefront of technology. Companies that provide similar services are required to differentiate from the rest of the pack. All of these facets of competition exist in the home improvement industry. Home Depot has more than 25 direct competitors including Lowe’s, Menards, True Value, Ace Hardware, Do It Best, Sears, Target, and Wal-Mart.11 Only a select few pose a true threat to Home Depot. Lowe’s Lowe’s is Home Depot’s largest competitor and holds a significant market share. Founded in 1946, Lowe’s grew from a small hardware store in North Carolina to the second largest home improvement wholesaler in the world. It currently operates 1,375 stores in 49 states and ranks 42 on the Fortune 500 list. Lowe’s can attribute its success to a philosophy similar to Home Depot’s: “Providing customers with the lowest priced and the highest quality home improvement products.”12 However, Lowe’s distinguished itself from Home Depot by targeting the individual customer, especially women, as Home Depot began to focus on contractors. Lowe’s will continue to differentiate from competitors by promoting and expanding through exclusive private labels or select brands. Premium kitchen cabinets and stone countertops are a few new product lines that Lowe’s is implementing within their stores. Much like Home Depot, Lowe’s is looking to expand by pursuing interest in installing services, special orders, and commercial sales.13 Menards Menards is Home Depot’s second biggest competitor.14 Although most competitors construct their stores in a compact fashion in order to adhere to real estate constraints, Menard’s is moving ahead with an opposing strategy. The midwestern home center chain has started to build two-story urban stores. “We might be No. 3 as far as store counts go, but we are a regional player and we are innovative,” said Menards spokeswoman Dawn Sands. Customers navigate the two-story stores using escalators that accommodate both the customer and their shopping cart. The stores also brag a unique customer experience, including a baby grand piano that provides in-store music, new boutique departments, upscale merchandise, specialty departments, wider aisles, and lower, more convenient merchandise shelves.15 Home Depot’s competitive position is not only affected by the strategies used by the top two competitors, but also by the relationships it maintains with suppliers. 155 Home Depot relies on 10,000 to 12,000 suppliers to keep its shelves stocked, creating a tremendous challenge in regard to the process and coordination of the logistics.16 During the reign of CEO Robert Nardelli, Home Depot expanded at a rapid rate and failed to take the additional supply requirements into consideration,17and thus found its brand image in jeopardy when suppliers were unable to keep up with the increased production demands. When Robert Nardelli became CEO, he inherited a disorganized system of suppliers that relied on archaic accounting practices, including individual product order forms and fax-only lines of communication.18 Nardelli placed increased emphasis on renovating the Home Depot supplier networks. The first thing he did was to gradually implement the Home Depot Online Supplier Center and the Cognos 8 Scorecarding software. The Center “features continuously updated information on how to do business with Home Depot, including the corporate performance policy, updates, news, information on events and training and scorecards.”19 The Cognos 8 system gathers data from warehouse management sources, purchase orders, and contract terms, and condenses it. The data is then analyzed and each supplier is rated on various aspects of the transaction. All the information is available online via the supplier center, allowing suppliers to see what areas they should improve to become more efficient.20 Nardelli also held workshops for specific groups of Home Depot suppliers. For instance, Nardelli hosted meetings with Home Depot’s top 15 strategic suppliers four times a year to discuss plans for new products and store promotions. The suppliers toured a Home Depot Store and gave Nardelli input on product placement.21 Because Home Depot has such a wide variety of suppliers, including suppliers from many different countries, it offers overseas workshops to educate prospective suppliers. The latest workshop took place in Shanghai and was conducted by native speakers in an effort to educate vendors on “how to do business with Home Depot, and be a better supplier overall.”22 Another area of innovation is Home Depot’s inventory and warehousing procedure. Home Depot prefers to receive products directly from their suppliers, eliminating the need for distribution centers, which are popular with many other retail organizations.23 This system has serious benefits and drawbacks. First, it allows Home Depot to leverage the space it has and display a multitude of products in a warehouse setting. This capability is beneficial because customers are able to see the products available and purchase them in the same visit. The major drawback to this system is that each store must have an extremely efficient and organized Customers Although Home Depot was originally designed as a home improvement superstore that would cater to both individual consumers and building contractors, throughout its tumultuous history, Home Depot has changed its focus a number of times. During Nardelli’s reign, cost cutting was a key focus and the individual customer was neglected in lieu of professional contractors who purchased materials in bulk amounts. Many long-time Home Depot customers have switched to competitors, mainly Lowe’s, because of constant inefficiencies at Home Depot. One customer explained that he had to wait three months to get his kitchen remodeled due to errors on Home Depot’s behalf and he will now “go out of [his] way to go to Lowe’s.”26 This customer’s experience is not unique and new CEO Frank Blake has acknowledged the magnitude of this issue. Home Depot has sold its contractors supply division, which will allow them to resume the focus on the individual customer.27 Due to the wide range of customers it caters to, Home Depot will likely face significant competition from other firms selling substitute services that match the information provided by Home Depot in the do-it-yourself segment. Substitute Information Services for Do-It-Yourself Customers Most companies focus on differentiating their products and services in order to combat rivalry, but also obtain enough loyalty to dissuade customers from switching to a substitute product. Not many substitutes can realistically threaten the success of Home Depot’s product sales because they offer such a wide variety of products and people will always need to build houses and desire to improve existing homes. However, Home Depot’s services, Case 12 • The Home Depot Suppliers warehouse supply chain operation. If a store runs out of a particular item, the customer will have to wait until the supplier can produce more of that item, which can take more time than transporting an out-of-stock item from a distribution center to a local store.24 Finally, Home Depot has utilized a system of “less than truck load” store deliveries, which allows its trucking partners to carry inventories to Home Depot stores along with products destined for other customers to save on transportation costs. But as Home Depot expands, it may switch to a dedicated trucking system with full truck loads servicing multiple stores in a specific region.25 Home Depot has developed many innovations to help make transactions with suppliers more efficient. One of Home Depot’s biggest challenges is ensuring good interactions with its customer base. Case 12 • The Home Depot 156 such as installation, may be hampered by substitutes. Today numerous Internet sites offer “How to” information as well as structured plans for various types of home improvement projects. HGTV and other home improvement shows may also deter customers away from Home Depot’s services. One way to fend off threats from rivalry and possible substitutes is for Home Depot to expand its operations internationally. International Operations Home Depot is the largest home improvement retailer in the world and employs 335,000 people. In light of the industry trends that are occurring, Home Depot is reaching out to new markets, which may give them additional sources of revenue as well international business experience. Stores are opening in Canada and Mexico. In Canada, Home Depot acquired Canadian hardware store Aikenhead Hardware, and has ambitions to take over its biggest Canadian competitor Rona Hardware.28 The most recent stage of expansion includes 12 stores in China, called “The Home Way.”29 This foothold in Asia will allow them access to markets that were previously inaccessible. The Chinese home improvement industry is a refreshing niche market with a lot of potential for new sales for Home Depot. In China, when a consumer purchases a home from a contractor, they purchase an unfinished shell. The house itself is little more than four walls and floor.30 In order to make the house livable, Chinese consumers must pay contractors, including electricians, plumbers, and drywall experts, to renovate the house. Home Depot plans to provide Chinese consumers with the hardware and skills to do much of the renovation work themselves. In order to meet this goal Home Depot will need to train an army of knowledgeable salespeople who can provide assistance and workshops for consumers.31 Home Depot will face a number of challenges as they expand into China. It must contend with the bureaucratic communist government that rules China. There are relatively few safeguards against nationalization, if the government decides to appropriate Home Depot assets or property. In addition the Chinese consumers may not have the desire to renovate their homes by themselves. Upper management must decide which method of entry would be most appropriate, and the most effective way to appeal to the average Chinese consumer. In addition, given the recent domestic housing recession, upper management must decide whether expansion into China is the most effective use of the firm’s money. Because of the diverse ventures Home Depot is involved in, Nardelli and more recently Frank Blake adopted some basic strategies that can be applied in order to maintain the company’s viability. Strategies Used As previously mentioned Home Depot historically used a decentralized organizational structure with an entrepreneurial management style, focusing on the retail stores. Store managers were given immense autonomy, and its stores were staffed with well-trained and knowledgeable employees who could offer advice and help customers find items they wanted quickly.32 Home Depot used to place a huge emphasis on creating a customer-friendly atmosphere with clean aisles, organized shelves, and well-stocked inventory. However, profit from the retail stores began to decrease as the home improvement retail industry matured and became saturated. Home Depot needed to find its next great idea that would sustain growth. Nardelli believed that the key to Home Depot’s success was the acquisition and incorporation of existing business into Home Depot Supply, while simultaneously squeezing efficiencies out of its retail stores.33 Home Depot Retail A critical part of Nardelli’s strategy was to reshape Home Depot into a more centralized organization.34 The centralization effort was evident in the management system that one journalist referred to as a “Command and Control Management system,” with a goal to replace the old, sometimes random, management style with a strict one.35 Management in corporate headquarters started to rank every employee on the basis of four performance metrics: financial, operational, customer, and people skills. Nardelli created an equation to measure effective performance. The equation is VA ! Q " A " E: the valueadded (VA) of an employee equals the quality (Q) of what the employee does, multiplied by its acceptance (A) in the company, times how well the employee executes (E) the task.36 Influenced by his military background, Nardelli often hired employees who had military experience. Of the 1,142 people who were hired into Home Depot’s store leadership program, which consisted of a twoyear training program for future store managers, 528 were junior military officers.37 He also brought many militaristic ideas into managing Home Depot, which required his employees to carry out his “command.” Home Depot began to measure everything from gross margin per labor-hour to the number of greets at its front doors to maintain better information, allowing the CEOs to improve control of the Home Depot operation. 157 The Home Depot at 12960 Foothill Boulevard, San Fernando, California 91342, has virtually no customer service. First I thought I couldn’t find any employees to help me because I used to go after work at around 5:00 p.m. Then I tried going during my lunch hour, then during off-work week days. To my surprise, no matter what time I go, there are no present employees out on the floor. The one or two that I’ve seen are obtained by hassling the cashiers. Try getting help from the guy out in the garden department and he answers with “I don’t know, I’m not an expert. They didn’t train me.” What kind of answer is this, what kind of store is this? The commercials on TV make it almost seem like a mom and pop candy store. You go in and you’re by yourself. You need a refrigerator? Tough. There’s nobody there to sell it to you. You need a chandelier? Tough—no one in this department to help you. What about the next department? Oh, he replies he knows nothing about the department next door. Customers beware: shop elsewhere.39 According to the University of Michigan’s annual American Customer Satisfaction Index released on February 21, 2006, with a score of 67, down from 73 in 2004, Home Depot scored 11 points behind Lowe’s. Claes Fornell, a professor at University of Michigan, stated that the drop in satisfaction was one reason why Home Depot’s stock price has declined at the same time Lowe’s has improved.40 The general appearance of Home Depot retail stores was becoming a drawback for customers. They often complained that Home Depot had become more like a “warehouse” that was unclean, unorganized, and far from the enjoyable shopping experience it had been in the past.41 This neglect of the Home Depot’s retail stores may have been the result of Nardelli shifting his focus toward new ventures, including Home Depot Supply. Home Depot Supply The building supply market during the early 1990s was a growing yet fragmented market segment worth $410 billion per year.42 Nardelli saw an opportunity to enter this new market because there were few large competitors. To reduce the cannibalization of sales from its existing retail stores, he announced that Home Depot would cut retail store openings by nearly half over a five-year period.43 Using the money saved from cutting retail store construction, Home Depot spent about $6 billion acquiring more than 25 wholesale suppliers to build up Home Depot Supply (HDS). HDS was a wholesale unit that sold pipes, custom kitchens, and building materials to contractors and municipalities. Because Home Depot had acquired so many wholesalers, HDS became one of the leaders in the building supply industry. For example, in 2005 Home Depot purchased National Waterworks and entered the municipal water pipe market. Home Depot’s biggest purchase was that of the $3.5 billion acquisition of Hughes Supply in 2006, which made Home Depot a leading distributor of electrical and plumbing supplies. HDS expected to have 1,500 supply houses with revenues of $25 billion annually by 2010.44 Due to the fragmentation of the building supply market, many contractors were associated with their regional suppliers based on long-standing relationships. Those regional suppliers offered a highly trained sales staff and specialized service, whereas HDS stores worked much like the standard warehouse format.45 Home Depot was challenged to satisfy a new range of customers’ needs, which were different from do-it-yourself customers. Therefore, HDS encouraged its sales employees by rewarding them, primarily in commissions, to win contracts. Furthermore, Home Depot retained most of the management of acquired suppliers, realizing the importance of cultural continuity. Nardelli insisted that top management, salespeople, and internal cultures of the acquired companies maintain their corporate names and colors on stores and delivery trucks.46 He believed that these efforts would help them keep existing long-term relationships with contractors. HDS was expected to earn 20 percent of the company’s overall sales. As mentioned, when Blake took over as CEO he saw the need to refocus Home Depot’s vision and again cater to the retail market. Therefore, in June 2007 Home Depot announced the sale of Home Depot Supply for $10 billion to a group of private equity firms (Brian Capital Partners, Carlyle Group, and Clayton, Dubilier, and Rice).47 The proceeds from the sale will be used to implement necessary changes in Home Depot such as increased capital spending, upgrading merchandise, and Case 12 • The Home Depot However, this lead to many underperforming executives being routinely pushed out of their positions. Since 2001, 56 percent of job changes involved bringing new managers in from outside the company.38 This hiring trend is quite different from the past, when managers ran Home Depot stores based on the knowledge built through the years of internal experience in Home Depot operations. In an effort to drive down labor costs, many fulltime employees were replaced by part-time employees. But this approach did more than just cut costs; it damaged employee morale, diminished the knowledgeable staff available to customers, and led to many complaints about poor customer service and understaffing. As one customer from San Fernando, California, stated: Case 12 • The Home Depot 158 hiring trained and qualified staff and sales associates.48 The latter is especially important because many employees were beginning to feel dissatisfied with their positions, leading to a dangerously volatile corporate culture. Corporate Culture Home Depot’s corporate culture has changed drastically as a result of Nardelli’s leadership style. Due to Nardelli’s military background, many of the changes he implemented were designed to create a more vertically oriented management structure. Originally each Home Depot store enjoyed a sense of autonomy, as each store director was able to set prices and promote products within that store to match the needs of the community in which it was located. Under Nardelli, each executive and store director was responsible for various financial targets, and if these targets were not met, they were immediately terminated. This expectation created a general atmosphere of fear and distrust. Throughout Nardelli’s tenure as CEO, 97 percent of top executives were removed and replaced. To further cut costs, Nardelli implemented a parttime workforce and eliminated many of the full-time employee positions. This trend caused a great deal of resentment from employees who had previously worked full time for Home Depot, because they could no longer receive medical and dental benefits. When the part-time workforce was combined with a management system that only focused on the bottom line, no time was left for taking care of the customer. The advent of new technology had a big impact on corporate culture, and ultimately customer service. Nardelli believed that by implementing automated checkout lines, customers would be able to pay for their purchases quickly and save time. This innovation would also cut down on employee hours, and checkout personnel would no longer be used. However, this plan backfired when the automated checkout machines malfunctioned more often than they worked correctly, and the few employees who were not laid off as a result of the innovation experienced a significant amount of stress due to having to fix the checkout machines, and answer customer questions at the same time. This frustration was mirrored by customers who were unable to find sales associates when they had specific questions. In addition to significant corporate culture problems, Home Depot’s financial statements were beginning to show signs of trouble for the home improvement giant. Financial Issues Due to the housing and home improvement boom, sales soared from $46 billion in 2000, the year Nardelli took over, to $81.5 billion in 2005, with an annual average growth rate of 12 percent.49 The Home Depot’s gross margins increased 3.5 percent from 2000 to 35.5 percent in 2005.50 For fiscal 2006, net sales were $90.8 billion with earnings of $5.8 billion, an 11.4 percent increase from fiscal 2005. Fiscal 2006 net sales in the retail segment were $79.0 billion, a 2.6 percent increase from 2005, which was driven by the opening of new stores. The Home Depot Supply segment contributed $12.1 billion, an increase of 161.6 percent from 2005. This increase was driven by solid organic growth and sales from acquired businesses.51 Although Home Depot remains one of the world’s largest home improvement retailers in the world, results for fiscal 2006 were disappointing, according to Frank Blake, current chair and CEO.52 Housing slowdowns have hurt the financial goals for the retail segment of Home Depot. In the third quarter of 2006, same-store sales at Home Depot’s 2,127 retail stores declined 5.1 percent.53 Economic and current market conditions caused a slowdown in the residential and housing market and an overall market share decline. Analysts do not expect an improvement until late 2007 or early 2008. The company’s main focus for fiscal 2007 will be on the retail segment of their business, with total investments of $2.2 billion of capital spending and investments.54 For Home Depot’s income statement, balance sheet, statement of cash flows, and key ratios, see Exhibit 1. For a comparison of January 2006 and January 2007 consolidated statement of earnings, balance sheet, and segment information, see Exhibits 2, 3, and 4, on pages 160, 161, and 162, respectively. Shareholders Even though Nardelli was helping Home Depot achieve drastic structural changes, stock prices were affected by the lack of focus of this retail organization. Home Depot’s shares were down 7 percent while archrival Lowe’s stock prices had soared more than 200 percent since 2000. The poor stock performance led to anger among many of the shareholders.55 (For a comparison of Home Depot’s top competitors and their industry and market, see Exhibit 5, on page 162.) Investment bankers are currently working on different ways to solve the share price problem such as returning $1.4 billion in cash to shareholders through dividends paid.56 The company’s dividend payout ratio is now approximately 24 percent.57 In addition, during fiscal year 2006, Home Depot returned cash to shareholders by spending $6.7 billion to repurchase 174 million shares, or 19 percent of its outstanding shares. A stock chart is provided in Exhibit 6, on page 163, which illustrates share prices between March 27, 2006, and March 27, 2007. 159 Income Statement (in US$ millions, except for per-share items) 01/28/07 01/29/06 01/30/05 Restated 01/29/06 Net Sales 90,837.00 81,511.00 73,094.00 64,816.00 58,247.00 Cost of Goods Sold 29,783.00 27,320.00 24,430.00 20,580.00 18,108.00 Income Before Tax 9,308.00 9,282.00 7,912.00 6,843.00 5,872.00 Net Income 5,761.00 5,838.00 5,001.00 4,304.00 3,664.00 01/28/07 01/29/06 Restated 01/28/07 01/30/05 Restated 01/29/06 02/01/04 Restated 01/30/05 02/02/03 Balance Sheet 02/01/04 Restated 01/29/06 02/02/03 Assets Total Current Assets $18,000.00 $15,269.00 $14,273.00 $13,328.00 $11,917.00 Net PP&E 26,605.00 24,901.00 22,726.00 20,063.00 17,168.00 Total Assets 52,263.00 44,405.00 39,020.00 34,437.00 30,011.00 $ 8,035.00 Liabilities and Shareholders’ Equity Total Current Liabilities $12,931.00 $12,706.00 $10,455.00 $ 9,554.00 Long-Term Debt 11,643.00 2,672.00 2,148.00 856.00 1,321.00 Total Liabilities 27,233.00 17,496.00 14,862.00 12,030.00 10,209.00 Total Shareholders Equity 25,030.00 26,909.00 24,158.00 22,407.00 19,802.00 Total Liabilities & Shareholders Equity 52,263.00 44,405.00 39,020.00 34,437.00 30,011.00 01/29/06 01/30/05 02/01/04 Restated 01/30/05 02/02/03 Restated 01/30/05 02/03/02 Net Cash Flows from Operations $ 6,484.00 $ 6,904.00 $ 6,545.00 $ 4,802.00 $ 5,963.00 Net Cash Flows from Investing (4,586.00) (4,479.00) (4,171.00) (2,601.00) (3,466.00) Net Cash Flows from Financing (1,612.00) (3,055.00) (1,931.00) (2,165.00) (173.00) Cash Flow Statement Key Ratios Price/Earnings (TTM) As of 03/26/07 $13.64 Annual Dividend .90 Annual Yield % 2.36 Quick Ratio (MRQ) Current Ratio (MRQ) .40 1.39 Return on Equity (TTM) 16.22 Return on Assets (TTM) 11.92 Return on Investment (TTM) 16.22 Data provided by Marketguide. Shareholder.com, the producer of this site, and The Home Depot, Inc. do not guarantee the accuracy of the information provided on this page, and will not be held liable for consequential damages arising from the use of this information. Source: Home Depot, 2007, http://ir.homedepot.com/summary_financials.cfm. Case 12 • The Home Depot Exhibit 1 Highlights of Key Financial Statements and Ratios for Home Depot Case 12 • The Home Depot 160 Exhibit 2 Statement of Earnings for Home Depot THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS AND YEARS ENDED JANUARY 28, 2007 AND JANUARY 29, 2006 (Unaudited) (Amounts in Millions Except Per Share Data and as Otherwise Noted) % % Three Months Ended Increase (Decrease) 1-28-07 1-29-06 $20,265 $19,489 13,627 12,896 5.7 GROSS PROFIT 6,638 6,593 Operating Expenses: Selling, General and Administrative 4,594 Years Ended Increase (Decrease) 1-28-07 1-29-06 $90,837 $81,511 61,054 54,191 12.7 0.7 29,783 27,320 9.0 4,132 11.2 18,348 16,485 11.3 442 5,036 413 4,545 7 .0 10.8 1,762 20,110 1,472 17,957 19.7 12.0 1,602 2,048 (21.8) 9,673 9,363 3.3 Interest Income (Expense): Interest and Investment Income Interest Expense Interest, net 4 (127) (123) 8 (35) (27) (50.0) 262.9 355.6 27 (392) (365) 62 (143) (81) (56.5) 174.1 350.6 EARNINGS BEFORE PROVISION FOR INCOME TAXES Provision for Income Taxes 1,479 554 2,021 736 (26.8) (24.7) 9,308 3,547 9,282 3,444 0.3 3.0 925 $ 1,285 (28.0)% $ 5,761 $ 5,838 (1.3)% 1,993 2,119 (5.9)% 2,054 2,138 (3.9)% $0.46 $0.61 (24.6)% $2.80 $2.73 2.6% 2,004 2,128 (5.8)% 2,062 2,147 (4.0)% $0.46 $0.60 (23.3)% $2.79 $2.72 2.6% NET SALES Cost of Sales Depreciation and Amortization Total Operating Expenses OPERATING INCOME NET EARNINGS Weighted Average Common Shares BASIC EARNINGS PER SHARE Diluted Weighted Average Common Shares DILUTED EARNINGS PER SHARE $ 4.0 % 11.4 % SELECTED HIGHLIGHTS % % Three Months Ended Number of Customer Transactions (1) Average Ticket (1) Weighted Average Weekly Sales per Operating Store (000’s) (1) Square Footage at End of Period (1) Capital Expenditures Depreciation and Amortization (2) 1-28-07 1-29-06 304 $56.27 308 $57.20 $ 617 $676 224 $1,032 215 $1,028 $476 $445 Increase (Decrease) Years Ended Increase (Decrease) 1-28-07 1-29-06 1,330 $58.90 1,330 $57.98 (8.7) $723 $ 763 (5.2) 4.2 0.4 224 $3,542 215 $3,881 4.2 (8.7) 7 .0% $1,886 $1,579 19.4% (1.3)% (1.6) –% 1.6 (1) Includes retail segment only. (2) Includes depreciation of distribution centers and tool rental equipment included in Cost of Sales and amortization of deferred financing costs included in Interest Expense. Source: Home Depot, 2007, http://www.homedepot.com. 161 THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JANUARY 28, 2007 AND JANUARY 29, 2006 (Amounts in Millions) 1-28-07 (Unaudited) 1-29-06 (Audited) ASSETS Cash and Short-Term Investments Receivables, net Merchandise Inventories Other Current Assets Total Current Assets $ Property and Equipment, net Goodwill Other Assets TOTAL ASSETS 614 3,223 12,822 1,341 18,000 $ 807 2,396 11,401 665 15,269 26,605 6,314 1,344 24,901 3,286 949 $52,263 $44,405 $ $ LIABILITIES AND STOCKHOLDERS’ EQUITY Short-Term Debt Accounts Payable Accrued Salaries and Related Expenses Current Installments of Long-Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt Other Long-Term Liabilities Total Liabilities Total Stockholders’ Equity TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY – 7,356 1,295 18 4,262 900 6,032 1,068 513 4,193 12,931 12,706 11,643 2,672 2,659 2,118 27,233 17,496 25,030 26,909 $52,263 $44,405 Source: Home Depot, 2007, http://www.homedepot.com. What Should Happen to Improve Home Depot? Home Depot has been plagued by many problems in its recent history. Robert Nardelli’s strategic approach of focusing on suppliers and improving efficiency demoralized much of the human capital in its retail business, and as a result seemingly reduced the effectiveness of Home Depot’s cherished organizational culture. The approach left employees afraid of their own executives, which forced them to focus on maintaining their current positions through hyperefficiency and in effect to fall short in customer service. This bottom-line thinking had drastic implications for Home Depot’s customer base as more customers left Home Depot to shop at other stores such as Lowe’s and Wal-Mart to meet their home improvement needs. In addition, a cyclical market and international expansion are issues that will need to be addressed. Frank Blake as the new CEO faces the monumental task of making the home improvement giant profitable again and restructuring to repair the damaged aspects of the corporation. With Blake in command, Home Depot has a good chance of leveraging its core competencies in the retail market and becoming an excellent corporation for customers and shareholders. Shareholders and employees alike anxiously await the future to see what lies in store for Home Depot. Case 12 • The Home Depot Exhibit 3 Consolidated Balance Sheets for Home Depot Case 12 • The Home Depot 162 Exhibit 4 Segment Financial Information for Home Depot THE HOME DEPOT, INC. AND SUBSIDIARIES SEGMENT INFORMATION FOR THE YEARS ENDED JANUARY 28, 2007, AND JANUARY 29, 2006 (Unaudited) (amounts in $ millions) Year Ended January 28, 2007 Eliminations/ Other (b) HD Retail (a) HD Supply $79,027 $12,070 $(260) $90,837 Operating Income 9,024 800 (151) 9,673 Depreciation and Amortization 1,679 197 10 1,886 42,094 10,021 148 52,263 3,321 221 305 3,963 Net Sales Total Assets Capital Expenditures Payments for Businesses Acquired, net Consolidated 3,542 – 4,268 Year Ended January 29, 2006 Eliminations/ Other (b) HD Retail (a) HD Supply $77,022 $4,614 $(125) $81,511 9,058 319 (14) 9,363 Net Sales Operating Income Depreciation and Amortization Total Assets Consolidated 1,510 63 6 1,579 39,827 4,517 61 44,405 Capital Expenditures 3,777 104 – 3,881 190 2,356 – 2,546 Payments for Businesses Acquired, net (a) Includes all retail stores, Home Depot Direct and retail installation services. (b) Includes elimination of intersegment sales and unallocated corporate overhead. Operating Income for the year ended January 28, 2007, includes $129 million of cost associated with executive severance and separation agreements. Source: Home Depot, 2007, http://www.homedepot.com. Exhibit 5 Industry Statistics and Comparisons Home Depot Lowe’s Menard True Value Annual Sales $81,511 $43,243 $6,500 $2,043 Employees 345,000 185,000 35,000 2,800 Market Cap ($ millions) $77,488 $48,852.8 0 0 Comparison of Home Depot to Industry and Stock Market Valuation Price/Sales Ratio Price/Earnings Ratio Price/Book Ratio Price/Cash Flow Ratio Company Industry1 Stock Market2 0.83 0.83 2.22 12.51 12.51 18.98 2.70 2.93 2.16 12.02 12.02 13.44 1 Industry: Building Materials, Hardware, Garden Supply, and Mobile Home Dealers 2 Market: Public companies trading on the NYSE, AMEX, and NASDAQ Source: © 2007, Hoover’s, Inc., All Rights Reserved, http://www.hoovers.com/home-depot/—ID__11470,ticker__—/free-co-fin-factsheet.xhtml. 163 Case 12 • The Home Depot Exhibit 6 Home Depot Stock Chart Source: Home Depot, Inc. (HD), http://moneycentral.msn.com/stock_ quote?Symbol=HD. Notes 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 2007, Home Depot, http://corporate.homedepot.com/wps/portal, March 28. Ibid. Ibid. Ibid. R. Farzad, D. Foust, B. Grow, E. Javers, E. Thornton, & R. Zegel, 2007, Out at Home Depot, BusinessWeek, http://www.businessweek.com, January 15. Ibid 2007, Home Depot, http://ir.homedepot.com/releaseDetail .cfm?ReleaseID=194738&ShSect=E, July 3. Ibid. 2007, Home Depot, http://corporate.homedepot.com/wps/portal, March 28. Ibid. 2007, http://www.hoovers.com, April 1. 2007, Lowe’s , http://www.Lowe’s.com, April 1. D. Howell, 2005, Lowe’s hammers home growth objective: National in a year, http://findarticles.com/p/articles/mi_m0FNP/is_6_44/ ai_n13726491. 2007, HD: Competitors for Home Depot, Yahoo! Finance, July 10. Ibid. R. Bowman, 2006, Home Depot turns its attention to supplier performance management, Global Logistics & Supply Chain Strategies, http://www.glscs.com/archives/06.06.casestudy.htm?adcode=5, June. Ibid. Ibid. Ibid. Ibid. Ibid. Ibid. R. Bowman, 2001, Global supply chain partnerships, Global Logistics & Supply Chain Strategies, http://www.glscs.com/archives/7.02 .homedepot.htm?adcode=5, July. Ibid. Ibid. B. Grow & S. McMillan, 2006, Home Depot: Last among shoppers, BusinessWeek Online, http://www.businessweek.com, June 19. H. Weber, 2007, Home Depot undecided on supply business, BusinessWeek Online, http://www.businessweek.com, March 22. 2007, Home Depot, http://en.wikipedia.org/wiki/Home_depot, accessed on April 17. Ibid. B. Grow & F. Balfour, 2006, Home Depot: One foot in China, BusinessWeek Online, http://www.businessweek.com, May 1. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. Ibid. D. Brady & B. Grow, 2006, Renovating Home Depot, BusinessWeek, http://www.businessweek.com, March 6, 50–56. Ibid. Ibid. Ibid. R. Farzad, D. Foust, B. Grow, E. Javers, E. Thornton, & R. Zegel, 2007, Out at Home Depot. D. Brady & B. Grow, Renovating Home Depot. Ibid. 2004, http://www.complaints.com/directory/2004/june/14/15.htm. D. Brady & B. Grow, Renovating Home Depot. H. Weber, 2006, Home Depot needs makeover, Washington Post, http://www.washingtonpost.com, January 6. 2006, Home Depot will buy building supply chain, Winston-Salem Journal, http://www.journalnow.com/servlet/Satellite?pagename=WS J%2FMGArticle%2FWSJ_BasicArticle&c=MGArticle&cid=11287692 38504&path=!business&s=1037645507703%20, January 11. C. Terhune, 2006, Home Depot knocks on contractors’ doors, Wall Street Journal, August 7. P. Bond, 2006, Commercial wholesale division doubles Home Depot’s supply business, The Atlanta Journal-Constitution, August 6. C. Terhune, 2007, Home Depot knocks on contractors’ doors, Wall Street Journal Online, http://online.wsj.com/article/ SB115491714152328447.html, July 13. Ibid. M. Flaherty & K. Jacobs, 2007, Bids for Home Depot Supply due Friday, BNET Today, http://www.bnet.com/2407-13071_23-88489 .html, July 5. Ibid. D. Brady & B. Grow, Renovating Home Depot. Ibid. Home Depot, 2007, The Home Depot announces fourth quarter and fiscal 2006 results, http://ir.homedepot.com, February 20. Home Depot, 2007, The Home Depot announces fourth quarter dividend, http://ir.homedepot.com, February 22. R. Farzad, D. Foust, B. Grow, E. Javers, E. Thornton, & R. Zegel, 2007, Out at Home Depot. Home Depot, 2007, The Home Depot presents 2007 key priorities and financial outlook, http://ir.homedepot.com,February 28. D. Brady & B. Grow, Renovating Home Depot. Home Depot, 2007, The Home Depot announces fourth quarter dividend, http://irhomedepot.com, February 22. Ibid.
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