The Home Depot (Ticker: HD) is the world’s largest home-improvement retailer along with being an American Fortune 50 company. The company operates 2,259 retail building supply/home improvement “warehouse” type stores all across the United States, Canada and Mexico. The Home Depot has over 340,000 team members and is based in Atlanta, Georgia. The average store size is just over 100,000 square feet along with an additional 24,000 square feet set aside for seasonal gardening.
The Home Depot’s two main customers are at home “do-it-yourselfers” and contractors. The main products and services offered help solve the wants and needs of customers involved with home construction and maintenance, renovation and remodeling.
The competitive environment for the home-improvement industry is broken into three major players: The Home Depot, Lowe’s and local retailers. They compete with local retailers that specialize in nearly every product and service offering. The Home Depot and Lowe’s are both “all offerings” locations spread throughout North America. Over the past decade Home Depot was stickily focused on expanding the store count and business lines whereas Lowe’s was focused on store count growth and perfecting their supply chain and internal technology.
Over the past 13 years The Home Depot has more than doubled its store footprint. It was aided by two major factors; First being that the home improvement and building industries were growing quickly providing a constant demand for product. Second, funding was easy to receive and it was relatively cheap because of low interest rates. Management began to “empire build” with their now sold professional supply business (now known as HD Supply) and cut costs in their big box stores to help reduce costs. With the reduction of cost came the reduction in customer satisfaction. Return to Retail
Noticing that customer satisfaction rating had severely slipped because of stock outs and poor team member engagement with the customer a new initiative was proposed. Marvin Ellison, Executive Vice President, U.S. Stores, proposed the “FIRST Relaunch”. The program focuses on putting the customers first, by “Do(ing) the unexpected”. The operational plan focused on customer service, being in stock on all products and creating a better store appearance (inside the physical store and within the community). In efforts to focus on customer service, more employees were hired and trained. Upper management also equipped each team member with more technology (PDA’s, walkie talkies, etc). There was a companywide initiative to integrate Hispanic merchandise, marketing and staffing. Home Depot switched to a regional distribution system while upgrading their internal information technology infrastructure to better keep stores’ inventory stocked properly.
This major overhaul materialized into The Home Depot’s stock outs dramatically decreasing. To create a stronger public image, Home Depot created The Home Depot Foundation which helps with community home building, disaster relief and veteran job placement assistance. These initiatives have greatly improved customer satisfaction and recognition in the community by increasing ratings from 55% to 75% (2008 to 2012). Current Economic cycle
Home Depot has clearly set itself up to be successful in the recent upswing in the housing markets. Their technology upgrade has proven to be successful in keeping stores stocked and employees more engaged with helping the customers. Management has responded to the late spring, summer, and early fall build up in construction needs by resorting to hiring part time and seasonal workers while still giving them the proper training to satisfy the customer.
The current Chairman and Chief Executive Officer, Frank Blake, is often credited with the company’s turnaround ever since taking the helm. He sold the professional supply business (now known as HD Supply) to help the company focus on their core competencies. Blake also helped implement the customer first initiatives. All while cutting his own pay and switching his future pay to stock and options, which are based on The Home Depot’s performance.
Since Home Depot has slowed their store expansions, cash reserves have grown to match total debt due in 5 years. Sales have increased steadily since the industry lows in 2008. Cash from operations have also steadily increased to match market high 2006-07 levels. A large portion of the cash flow each year has been focused toward share repurchases and steadily increasing their yearly shareholder dividends. Lending Risks
The Home Depot is in the heart of an uncertain housing environment. The sales and financial results each year are closely tied to the consumer spending money on construction and housing maintenance. If the economic environment were to deteriorate it is likely many consumers would hold off on simple maintenance projects, which is currently the bulk of store sales. The housing market has seemingly bottomed but it still remains unclear to if the recent increase in housing sales is going to last.