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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