Introduction The Home Depot, Inc.
is the second largest domestic retailer behind Wal-Mart and the world’s largest home improvement retailer based on fiscal year 2008 net sales (Home Depot 2008 annual report, p.1). At the end of fiscal year 2008, the Home Depot operated 1,971 stores in the United States, U.S. Virgin Islands, Puerto Rico, and Guam (2008 Annual Report, p.3). In addition, The Home Depot, Inc. operates 262 stores internationally with 176 stores in Canada, 74 stores in Mexico and 12 stores in China. (2008 Annual Report, p.3). The average covered retail square footage of each store is 105,000 square feet with approximately an additional 24,000 square feet of outdoor garden sales space (2008 Annual Report, p.1) Here is a breakdown by state of current, domestic Home Depot operations at the end of fiscal year 2008. (Source: 2008 Home Depot Annual Report, p.8)
The following chart breaks down the location of Home Depot’s international operations.
(Source: Home Depot Annual Report, p.9)
The percentage of net sales by product group in fiscal year 2008 broke down as follows. (Source: 2008 Annual Report, P. 2 )
The Home Depot has three main target marketing groups they focus their sales strategy on. These groups include; • Do-it-yourself-customer: People who own their own homes and like to complete home improvement projects on their own. • Do-it-for-me customer: These are customers who own their own homes and buy their own home improvement products but hire third party contractors to complete the project for them. • Professional customers: This group includes general contractors, handymen, remodelers and small business owner (2008 Annual Report). Home Depot History
The Home Depot Inc, was founded in 1978 by Bernie Marcus, Arthur Blank, Ron Brill and Pat Farrah in Atlanta, Ga. (Roush, “Inside Home Depot”). In that same year, The Home Depot filed articles of incorporation in the state of Delaware (2008 Annual Report). The owners initially opened two stores on June 21, 1979 in the metro Atlanta area ( BusinessWeek Company Profile: The Home Depot). In 1981, Home Depot went public with a stock offering (http://corporate.homedepot.com/wps/portal/History). In 1989, the company celebrated the opening of its’ 100th store (http://corporate.homedepot.com/wps/portal/History). The company began its’ international expansion in 1994 with the acquisition of home improvement stores in Canada (http://corporate.homedepot.com/wps/portal/History). In 2001, Home Depot expanded into the Mexican market and in 2006 the company expanded into China by purchasing The Home Way, a twelve store home improvement chain based in China (http://corporate.homedepot.com/wps/portal/History). Home Depot Stock Information Since 1984, Home Depot stock has traded on the New York Stock Exchange under the ticker symbol “HD” (2008 Annual Report, p. 12). The stock generally trades in a fairly tight range with fiscal year 2008 performance down from fiscal year 2007 prices. 2007 and 2008 stock performance number, by quarter, is stated below.
(Source: 2008 Annual Report) The following graph illustrates Home Depot’s stock performance versus The S&P 500 Index and the S&P Retail Composite index. The graph assumes $100 dollars invested at the closing price of its common stock on the New York Stock Exchange on January 30, 2004 with all dividends reinvested.
(Source: 2008 Annual Report P. 13 )
Home Depot Financial Statements The Home Depot was affected by the sudden economic down turn that started in September of 2008 with the failure of several Wall Street investment banks and insurance companies. 2008 sales were negatively impacted by the soft residential housing and home improvement markets, higher unemployment rates domestically and a tightening in the consumer credit markets (2008 Annual Report, p. 18). The Home Depot saw a 7.8% decrease in YOY 2008 net sales or 71.8 billion dollars compared to fiscal year 2007 net sales of 77.3 billion dollars in sales. Concurrent with the decline in net sales, Home Depot saw an increase of Selling, General, and Administrative expense in fiscal year 2008 of 4.7% or 17.8 billion dollars in 2008 compared to 17.1 billion dollars in fiscal year 2007 (Annual Report, p,18). The Home Depot should recognize future savings from the sale of HD Supply in 2007 and the closing of 34 Home Expo stores and 5 under producing Home Depot home improvement stores (Annual Report, p.19). However, Home Depot sales “has been and could continue to be negatively impacted by the level of competition in various markets” (Annual report, p.18). The following Consolidated Statement of Earnings and the data included in the statement are important in evaluating the performance of our various operations worldwide.
(Source: 2008 Annual Report, p. 17) Analysis: Strengths of Home Depot There are many strengths arising out of the Home Depot operations. These strengths include the following. • The size and the concurrent buying power with vendors allows Home Depot to offer customers the lowest price possible on most of their home improvement products. • The Home Depot brand name itself is a significant strength. • Home Depot has focused on reducing the amount of inventory it is carrying while improving in-stock rates on all items that are in the store (Annual Report, p.2) • Stores offer a number of proprietary items exclusive to the Home Depot. These items include Behr Premium Plus paint, Hampton Bay Lighting, Vigoro Lawn Care products, Husky hand tools, RIGID and Ryobi power tools, Pegasus faucets and Glacier Bay bath fixtures (Annual Report, p.2). • Currently in the process of creating additional strategic alliances to enhance the number of products exclusive to the Home Depot (Annual Report, p.2). • Beginning in 2010, the Home Depot will be offering the Martha Stewart paint brand and its’ subsidiary, Home Decorators Collection will be offering a line of Martha Stewart Home products including furniture, rugs and other household fixtures with the Martha Stewart name. (Strengths of Home Depot, cont.)
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Home Depot has strengthened their financial position by selling off HD Supply in 2007 and closing all of its high end Home EXPO stores in early 2009 (Annual Report, p.3). These operations were losing money for the Home Depot. With the sale of HD Supply and Home EXPO stores, The Home Depot has refocused its marketing strategy on its core competencies and stores. Implementing a global sourcing merchandising program allowing the Home Depot to source high quality merchandise at low prices. These savings are passed on to the customer (Annual Report, p. 2). Even though it is hard to quantify, Home Depot controls approximately 20% of the home improvement market. (Annual Report, p.3). In 2009, The Home Depot expanded its sales force offering its core constituencies greater customer service. The Home Depot Home Services division offers the do-it-for-me customer Home Depot approved contractors to install items such as bath fixtures, remodel kitchens and work on a variety of other contractor type services. Labor costs are relatively low compared to competitors who have Union labor in its stores. Home Depot offers customers a variety of credit options for big ticket purchases. Analysis: Weaknesses of Home Depot
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Because of its size, Home Depot has difficulty responding to external and internal threats and problems in a timely manner. Acquiring competent talent in the customer service area due to the lower wages it offers prospective employees. Does not offer a lot of depth in particular product categories. This is a problem most big box retailers deal with. Cannot offer the type of personal service that small, local hardware and home improvement stores can offer customers. Does not offer high end home improvement products. Has seen increases in the cost of its sales. Increased trouble maintaining high in-stock levels due to the fact that a majority of its vendors and suppliers are located in India, China and other Far East countries. It is difficult to get quick turnaround on ordered items. Stores are not geared toward attracting female customers, who make most household buying decisions. Analysis: Opportunities available to Home Depot
Expanding its presence in Mexico and China. Those markets are set for continued growth. • Opportunity to capture a larger portion of the domestic home improvement market. Currently, the Home Depot has approximately 20% of the domestic home improvement market. (Home Depot Opportunities cont.) • Opportunity to capture a portion of the green building market in the next 10 to 20 years.
Increased opportunities exist in expanding their on-line sales business for Home Depot and Home Decorators Collection. Because their large cash position, The Home Dept has the opportunity to acquire competitors and to expand operations domestically and internationally. Analysis: Threats facing Home Depot
In its 2008 Annual Report, Home Depot lists a number of threats and risks facing them in the future. The following information has been extracted from the Home Depot 2008 Annual Report, pp 5-7. • • Continued deterioration of the economy including high unemployment rates and declining housing starts. The decline in the economy may dissuade consumers from buying or postponing the acquisition of home improvement products. Challenges in finding and working with competent suppliers globally. It is a continuing problem finding quality suppliers globally that meet our expectation in terms of quality and maintaining appropriate fill rates on our orders. This is a continuing but unquantifiable risk Home Depot faces on a daily, weekly, monthly and yearly basis. The threat of not being able to offer products that are different than our competitors. The Home Depot has begun a strategy of building strategic alliances with suppliers and acquiring products made exclusively for Home Depot. If they are unable to expand this strategy with different suppliers, future product differentiation could be difficult or impossible. Home Depot’s ability to obtain favorable credit and financing in order to maintain liquidity. The current tightening of the credit markets poses a serious threat to Home Depot’s liquidity levels. Uncertainty of the new updated supply chain and associated technologies. In the short term, these changes could adversely affect fill rate, increase the number of backordered items and generally reduce appropriate customer service levels. The threat of not being able to effectively respond to changing customer needs, buying patterns or trends Potential inflation or deflation that could affect raw material prices such a as lumber, petroleum and changes in labor costs due to potential inflationary or deflationary pressures. The threat of changing local, state and federal laws including changes in tax rates, labor laws, (specifically laws that encourage unionization) and environmental laws which includes the proposed cap and trade legislation in Congress. The threat of not being able to maintain qualified and competent sales associates at the store level. There are constant cost pressures due to increasing health insurance premiums and prevailing wage rates. In addition, hourly sales associate positions tend to have high turnover rates and the ability to constantly fill these positions with qualified employees is a constant threat. (Threats, cont.) The threat of making faulty assumptions on the management level related to accounting, investment, tax matters and assumptions on litigation outcomes.
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The threat of increased competition could adversely affect Home Depot’s current market share. This includes competition based on price, product availability and customer service. The threat of adverse outcomes in one of the number of legal proceedings the Home Depot is involved. Lawsuits and litigation is inherently unpredictable and excessive judgments in any of these suits could have a detrimental affect on the Home Depot bottom line and a detrimental affect in public relations. The changing regulatory environment related to information security for customers, suppliers and employees. A breach of our duty could lead to a loss of sales, fines, lawsuits and loss of reputation in the public. The threat of not being able to open new locations in new markets due to unforeseen problems in land acquisition, lease negotiations, obtaining and retaining qualified employees. The threat of not being able to expand and open new operations in select international markets. Some of these threats include, fluctuating currency rates, restrictive and non-business friendly laws in specific foreign countries, economic and political upheaval, foreign country tax laws and specific U.S. laws that govern domestic countries operating in foreign countries. Conclusion
The Home Depot is the fastest growing retailer in United States history. They have gone from opening its first two stores in 1979 in metro Atlanta, GA to now having 2,233 stores operating domestically and internationally. The recent sell-off of HD Supply and Home EXPO stores was a very good move from a financial and marketing standpoint. This move allows Home Depot to focus on its core competencies at traditional Home Depot stores. In addition, Home Depot has abandoned the marketing and pricing strategy of offering temporary discounts and special product promotions and now has shifted to a traditional “everyday low pricing strategy”. In addition, high domestic unemployment rates and the depressed housing markets have had an adverse affect on Home Depot operations. However, the age of the housing market inventory is increasing and with this, there will be a need for home improvement products in the future. The Home Depot must continue to build strategic alliances with suppliers and offer unique products to the consumer that differentiate the Home Depot from other competitors like Lowes, Wal-Mart, Sams Club, Costco and other big box retailers that want a piece of the home improvement market. The selling off and closing of underperforming assets has positioned Home Depot to concentrate on what has made it the world’s largest home improvement retailer. Home Depot became the fastest growing retailer by offering a large selection of quality products at everyday low prices.
References 1. 2008 Home Depot Annual Report and 10-k filing (2009)
2. BusinessWeek Company Profile: The Home Depot (2007) 3. Home Depot corporate website: http://corporate.homedepot.com/wps/portal/History 4. Roush, “Inside Home Depot”, (2002)