US Retailers
Present by
Karen Lin & Haoying Guo
Industry Analysis
Retail Sector
• Establishments engaged in retailing merchandise
• Generally without transformation
• Final step in the distribution of merchandise
Retail Sector
• Highly Competitive Industry
• Common Factors influence the industry:
–
–
–
–
–
–
–
Cost of goods
Consumer debt level
Economic condition
Customer preference
Inflation
Employment
Weather Pattern
Retailers In the U.S. Economy
• Retailer trade takes up:
– 11.7% of national employment
– 12.9% of all establishments
• In 2003, the average retail trade employment is
14,911,500
• In 2003,nonsupervisory workers' average hourly
earnings were $11.90
Monthly Sales For Retail
In Millions
2005 Jan
2004 Dec
2004 Nov
2004 Oct
313,730
315,078
311,555
292,856
Estimated Annual Sales: 3.6 Trillions
Value Retailing
• Definition:
– The business of retailing famous-name, quality
merchandise at prices at least 25% below the regular
retail price.
• Most large retailers are belong to this catalog.
(Such as Wal-Mart and Home Dept)
• The value retailing sector’s share of total retail
sales is 7.5%
Wal-Mart
Wal-Mart at a Glance
 Wal-Mart Stores, Inc. is the world's largest
retailer
 The company employs more than 1.5 million
associates worldwide
 More than 138 million customers per week
visit Wal-Mart stores worldwide
Senior Officers
 H. Lee Scott --- President and CEO
Named in January 2000
25-year veteran
 Other Senior Officers
Promoted internally
Operations
 Wal-Mart Stores
 Includes: Discount Stores, Supercenters and
Neighborhood Markets
 SAM’S CLUB
 International
 comprised of wholly owned operations in Argentina,
Canada, Germany, South Korea, Puerto Rico and the
U,K, the operations of joint ventures in China and
operations of majority-owned subsidiaries in Brazil and
Mexico.
U.S. Domestic Competitors
Key Success Factors
Do the same things as other retailers but Better
 "Every Day Low Prices"
 Technology
 Sales data sharing with major suppliers
 Lasting Relationships with Suppliers
 One-to-one relationship with medium and small
suppliers.
How Wal-Mart Grows

Building new stores and Clubs in the
attractive sites.

Recent Strategy: move towards grocery
side
 Adding more “Neighborhood Markets”
Expansion of 2004
 Domestic
139 new Wal-Mart Stores
130 conversions and/or relocations from
Discount Stores to Supercenters
13 SAM’S CLUBs opened
 International
Square footage increased approximately 46
million square feet (or 8%)
Negative Impact of New Stores
 Additional stores take sales away from
existing units.
 The comparative store sales will be reduced
by approximately 1%.
Performance of 2004
 Total Company net sales increased 11.6%
from fiscal 2003 to $256.3 billion.
 Total Assets increased 10.7% to $104.9
billion
 International segment had an operating
profit increase of 18.6% and a sales
increase of 16.6%
 4 billion tax paid takes up 1/446 of the total
U.S. Federal taxes
Income Statement (millions)
Ratios
2004
2003
2002
Gross Margin
22.5%
22.3%
22.0%
(SG&A)/(Net Sales)
17.5%
17.4%
17.2%
(Interest
costs)/(Net Sales)
(Net Income)/(Net
Sales)
0.32%
0.42%
0.58%
3.53%
3.46%
3.23%
Segments Ratios
Balance Sheet
Cash Flow Statement
Stocks
 Initial Public Offering in 1970
200,000 shares for $16.5 per share
 Up to March 14, 2005
4,234,866,944 shares outstanding (11 Stock
splits)
$51.60 per share
 Annual rate of return from 1970 to 2005
29.56% per year
Dividend
 Began paying dividends in 1974
 Increased the annual dividend payment
every year
 Paid out more than $11 billion to
shareholders
 2004, the annual dividend payment
increased by 44%
Share Repurchase
 Wal-Mart also has a share-repurchase
program
 Since beginning the program, Wal-Mart has
repurchased more than $13 billion in shares.
 In 2004, Board of Directors authorized the
repurchase of another $7 billion
Options
1-year Stock Chart
1-years Comparison
Some Measures
 Total Cash Per Share (mrq):1.3
 Return on Assets (ttm):9.36%
 Return on Equity (ttm):22.99%
 Book Value Per Share (mrq):11.621
 Dividend Yield:1.16%
5-years Stock Chart
5-year Comparison
Stock Chart Since Beginning
Can Wal-Mart Still Grow?
 There is definitely room for growth:
In U.S., Wal-Mart sales are less than 10 percent
of the retail market.
Even smaller market share outside US.
 Problems:
The same business model works everywhere?
Intensive competitions in international market.
Recommendation
 No one can beat Wal-Mart
 Owns lots resource and quite experienced in
Retailing
 Takes time to expand internationally
 In one year time zone, the Stock price is
lowest.
Buy For Long Term Investment
Retail Industry in
Home Improvement
 Home centers, lumberyard, and hardware
stores were primary retail outlets.
 US Retail Sales of Home
Improvement Products,
by Type of Store, 1998:
Industry Overview
 Traditional retailers: lumberyards & hardware stores.
 Home centre
 A combination of the two
 Size, concentration on the homeowner, one-stop
shopping, self-service, customer convenience
 Warehouse-type Home Centre
 Created markets by making DIY materials affordable and
accessible
 Competition leads to acquisition & consolidation
 (1) Home Depot (1/3 market share, 12.9%)
 Competitors: Lowe’s Companies, Menard, Hechinger,
Payless Cashways
Consumer
 Professional builder
 Contractor
 DIYer
 Boomers are key in home improvement
market
 New market: Female homeowner
About The Home Depot
 Second largest retailer in the U.S.
 Funded in 1978 in Atlanta, Georgia.
 Co-founder: Arthur Blank & Bernard Marcus
 The world’s largest home improvement retailer.
 Operates more than 1,800 stores across North America.
 Also in Mexico, the District of Columbia, and Puerto Rico.
 Brisk pace in store expansion from less than 100
stores in 1989 to almost 800 in 1999.
 Owns 82% of real estate.
Leadership
Robert (Bob) L. Nardelli
Chairman, President and CEO
Joined HD in December 2000.
Former president and CEO of GE
Power Systems.
 Strategy: Enhancing the core retail network
through distinctive and innovative
merchandise, store modernization and
technology investment; extending its
business through new store formats, online
sales and installation services; and by
expanding to new geographies and
professional customer segments.
Leadership – Exec. VP

Francis Blake
 Business Development and Corporate Operations. (2002)

John Costello
 Merchandising & Marketing. (November 2002)

Robert DeRodes
 Executive Vice President & Chief Information Officer. (2002)

Dennis Donovan
 Human Resources (April 2001)

Frank Fernandez
 Secretary and General Counsel (April 2001)

Tom Taylor
 Home Depot Stores (1984)

Carol B. Tomé
 Executive Vice President & Chief Financial Officer (1995)
3 Business Segments
 Home Depot Flagship Stores
 First three stores opened in Atlanta in 1979.
 U.S. and Canadian stores range in size from 45,000 square feet to 165,000




square feet (avg. 106,000 sq. feet of enclosed space + 22,000 sq. feet in
the outside garden area.)
Sells 40,000 to 50,000 different kinds of home improvement supplies,
building materials, and lawn and garden products.
How-To Clinics, At-Home ServicesSM, Tool Rental Centers, Truck Rental.
National brands account 88%+ of the merchandise in the stores.
Exclusive brands
 EXPO Design Center
 Over 50 stores in major markets in 16 states and growing
 Cater to design professionals with home decorating products & services.
 Full design and installation services with project superintendents to oversee
complete job
 Other Home Depot Stores
 Supply stores for commercial & industrial customers.
 Landscape Supply stores for landscape & garden pros.
Merchandise Selection
& Sales

Stores’ merchandise selection is based on particular
customer and climate need, and on local building
code requirements. Different stores don’t carry the
same products, due to different merchandise
demands in different geographical areas.

34% building materials, lumber, floor & wall coverings
27% plumbing, heating, lighting, electrical supplies
15% seasonal & specialty items
14% hardware & tools
10% paint and other products




Key Success Factors




Economies of scale
Low price
Level of customer service
Wide array of products
“We are credited with having revolutionized
the home improvement industry by offering an
unparalleled selection of products and
services under one roof.”
3 Sources of Future Growth
 Open new stores.
24-hour Home Depot outlets
Smaller villager’s hardware stores
Urban format stores
 Cater to professional customers.
 Female Homeowners
News - Summary

Over past 4 years, The Home Depot has increased sales
by 60% and earnings per share by 105%.

Increase in cash dividends & share repurchase program.
2002
2003
2004
2005
Annual increase in
Cash Dividend
20%
24%
25%
23%
Share Repurchase
Program
+ $2 billion
+ $1 billion
Reach
$7 billion
+ $2 billion

Acquisition of home centres, supply companies, and
distributors.

Oct 10, 2002 - The Home Depot announce to open
two sourcing offices in Shanghai and Shenzhen
Recent Awards & Recognition







10 Best Boards in the United States, BusinessWeek
(2002)
No. 13 Ranking, Fortune 500 (2003)
No. 22 Ranking in Profit, Forbes listing of America’s 500
Top Companies (2003)
Top 20 Companies for Leaders, CEO Magazine (2002)
Excellence in Employee Development, Retail Council of
Canada (2002)
Best Friend Award for work with local communities &
youth, LA’s Best (2002)
Flex Your Power Energy Conservation Award, Governor
of California (2002)
Operational Highlights
2003
Store count
Average ticket
Weighted avg. weekly
sales per store
Weighted avg. sales
per
sq. foot
1,707
%
chg
11.4
2
2002
1,532
%
chg
14.9
3
2001
1,333
$
$
$
3.48
1.62
51.15
49.43
48.64
$763,00 (1.17) $772,00 (4.93) $812,00
0
0
0
$
370.87
•By Oct. 31, 2004: 1754 stores.
0.18
$
370.21
(4.57)
$
387.93
Financial Statements
Financial Highlights
– Income Statement
USD$ (in million)
2003
% of
Sales
2002
% of
Sales
$ 58,247
2001
Net Sales
$ 64,816
$ 53,553
Gross Profit
$ 20,580
31.75%
$ 18,108
31.11%
$ 16,147
Total Operating Expenses
$ 13,734
21.19%
$ 12,278
21.08%
$ 11,215
Interest Expense
$
(62)
0.096%
$
(37)
0.064%
$ 4,957
Net Income
$ 4,304
6.64%
$ 3,664
6.29%
$ 3,044
2003
2003 vs.
2002
2002
2002 vs.
2001
2001
Basic Earning per Share
$
1.88
19.7%
$
1.57
20.77%
$
1.30
Diluted Earning per Share
$
1.88
20.5%
$
1.56
20.93%
$
1.29
# of Outstanding Shares
2,275,220 K
(2.51%)
2,333,740 K
# of Outstanding Shares (Jan 31, 2005): 2,195,960 K
(0.52%)
2,345,888 K
Financial Highlights – Balance Sheet
2003
$ 2,826 M
$ 1.24
2002
$ 2,188 M
$ 0.94
2001
$ 2,477 M
$ 1.06
26.36%
27.78%
25.48%
58.26%
57.21%
58.25%
$ 34,437 M
$ 22,407 M
$ 30,011 M
$ 19,802 M
$ 26,394 M
$ 18,082 M
ROA
12.50%
12.21%
11.53%
ROE
19.21%
18.50%
16.83%
Book Value per Share
$ 11.041
Cash
Cash / #of Shares
Merchandise Inventories/Total
Asset
Net Property & Equip. / Total
Asset
Total Assets
Stockholders’ Equity
Financial Highlights
– Statement of Cash Flows
USD$ (in million)
Net Cash from Operations
Capital Expenditures
Net Cash Used in Financing
Activities
Repurchase of Common Stocks
Cash Dividends Paid to
Stockholders
2003
2002
2001
$ 6,545
$ 4,802
$ 5,963
(3,508)
(2,749)
(3,393)
(1,931)
(2,165)
(173)
(1,554)
(2,000)
–
(595)
(492)
(396)
Free Cash Flow
= CFO – Cap Exp – Preferred Div – Debt Repayment + New Debt Issues
= $ 3,028 M
Option – Exec. Compensation
Option - continue
Option - continue
The Percent of Class column indicates beneficial ownership of less than 1%, based on
2,241,907,929 shares of common stock outstanding as of April 1, 2004
Derivatives
 Objective: to decrease the volatility of earnings
and cash flow associated with fluctuations in
interest rates.
 Several interest rate swaps with a total notional
amount of $475M that swap fixed rate interest
on our $500M 53/8% Senior Notes for variable
interest rates equal to LIBOR plus 30 to 245
basis points and expire on April 1, 2006.
 At February 1, 2004, the fair market value of
these agreements was $19 million.
Direct Competitor Comparison
Company
HD
Home Depot
LOW
Lowe’s Companies
Retail
Industry
(Home Improve)
Market Cap
Employees
Revenue Growth (ttm)
Revenue (ttm)
Gross Margin (ttm)
EBITDA (ttm)
Operating Margin (ttm)
Net Income (ttm)
EPS (ttm)
P/E Ratio (ttm)
83.42B
299,000
11.30%
73.09B
33.42%
7.93B
10.84%
5.00B
2.258
16.82
43.78B
116,000
16.40%
36.46B
33.73%
4.61B
9.70%
2.18B
2.70
20.95
133.97M
5,190 K
13.10%
1.20B
25.23%
1.56M
2.48%
31.00M
1.58
16.49
Stock Quote – Summary
 Traded on the NYSE
 Included in the Dow Jones Industrial Average and Standard
& Poor's 500 Index.
Symbol:
Current Price:
52-week Range:
EPS (ttm):
P/E Ratio (ttm):
Dividend & Yield:
 Price/Sales (ttm):
 Price/Book (mrq):
 Beta: 1.279






HD
$37.99
$32.34 - 44.30
$2.26
16.82
$0.40 (1.03%)
1.17
3.52
Stock Price – 1 Year Chart
1 Year Chart:
Home Depot vs. Dow and S&P
Stock Price – 5 Year Chart
5 Year Chart:
Home Depot vs. Dow and S&P
Stock Price – Since 1984
Recommendation
 Expansion opportunity in foreign market
Canada & Mexico
 Pay out cash dividends
Good return
HD’s 1.03% vs. Lowe’s 0.28%
BUY
for long term investment