HOME DEPOT, INC.
in the New Millennium
Tom Thomson, Suzanne Ma, Todd Humphrey, Owen Clements
June 28, 2006
Agenda
Background/History
 Current situation
 Accounting and Finances
 Growth Initiatives
 Financial Analysis
 Forecast
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HOME DEPOT Inc.
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Founded In 1978 in Atlanta, Georgia
Largest Retailer of home improvement products
Stores were warehouses and sold large volumes
of goods at low prices
Offered ‘how-to-clinics’ and knowledgeable
customer service representatives
Between the Fall of 1981 & End of 1999, stock
price had risen at a compound annual rate of
29%
Uninterrupted growth in US economy since 1992
Competitors
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Lowe’s was second largest home improvement
retailer
Highly fragmented industry
Menards and Homebase – smaller but
concentrated in certain geographic areas
Hechinger was main competitor initially but in an
attempt to copy Home Depot’s warehouse style
retail stores, went out of business
Management Style
Constantly evolving
 Evaluate new ideas on smaller scale
before taking to entire store network
 Stores were located in all US states and
Canadian provinces 2/3rd of stores opened
in existing markets
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Current Situation
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October 12th, 2000 the company announced
lower then expected earnings for the 3rd and 4th
quarter
Largest one day drop (28%) to $35, a $33 billion
loss in market capitalization
Drop thought to be due to slowing economy,
overvaluation of stock price or problems with the
company’s future strategic direction
Economy had experienced uninterrupted growth
since 1992
Trivia Time with Todd!

What proportion of the world’s countries
had a GDP in 2004 less than $33 billion
according to the world bank?
 2/3
 1/3
 1/2
 5/8
 11/16
Accounting Policies
Point of Sale revenue recognition
 Cost as sold
 Perpetual inventory system
 Nothing interesting or exciting
 “Everything is Kosher” - Tom
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Growth Initiatives Classroom Opinions
Buy it Yourself customers
 Professional customers
 Store format changes
 Product category expansion
 International growth
 Internet sales
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Growth Initiatives Buy-it-Yourself Customers
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Choose Products but Installed by Third-Party
6,200 third-party contractors
Aging demographics
Market for installation services estimated at
$75 billion
Less than 2% of the installation market
Grow by 40% each year for the next five
years
Growth Initiatives Professional Customers
Large Market potential
 ‘Job Lot’ quantities
 Different needs for different customers
 Effect of professional customers on DIY
 Anticipated to influence sales the most out
of all of the initiatives
 More cyclical then DIY business
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Growth Initiatives Store Formats
Extending into specialty shops
 Very high end product range
 Required retainer fee
 Sales goal for each customer ($10,000)
 Investigating smaller stores to compete
more directly with Home Hardware etc.
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Growth Initiatives Product Categories
Increasing product lines
 Adding appliances to complement current
offerings
 Vertically integrate supply chain
 Tool rentals and truck rentals
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Growth Initiatives International Growth
Expansion into South America
 Joint venture in Chile
 Looking into expansion into the Far East
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Growth Initiatives Internet Sales
Information centre for customers
 Adding e-commerce abilities
 Intended to complement brick stores
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Talk Time with Tom!
Small groups
 10 minutes
 Evaluate each initiative individually
 Report back to us
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Growth Initiatives Buy-it-Yourself Customers
Excellent opportunity!
 Service will be key for this segment
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Growth Initiatives Professional Customers
Another opportunity!
 Largest and most profitable market
 Complement to the existing business
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Growth Initiatives Store Formats
Bad idea!
 Different business plan
 Doesn’t fit well with current strategy and
business plan
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Growth Initiatives Product Categories
Great idea!
 One stop shopping is the N. American way
 Why deliver when you can charge the
customer to do it themselves?
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Growth Initiatives International Growth
Bad idea!
 Risky, risky, risky
 Saturate N. American market first
 Joint venture was the best method for
entering this market
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Growth Initiatives Internet Sales
Hard to set up
 Expensive to maintain
 Peak of the dotcom boom
 Catalogue site, not order site
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Financial Analysis
Ratios
2000
1999
1998
Return on Equity
26.50%
22.70%
19.50%
Return on Assets
22.60%
19.70%
17.40%
Cash Flow from Operating Activities
2446
1917
1029
Cash Flows from Investing Activities
-2622
-2271
-971
Cash Flows from Financing Activities
281
248
-32
Cash and Equivalents EOY
168
62
172
Cash Flow
Forecast and Valuation
Current Status:
 Trending 25%-27% growth.
 NOPAT of 6%
 Debt to Equity: 7% vs. 93%
 Decreasing stock value: $68 to $35.
(From 12/99-9/00)
What It Takes To Get $48.20?
Observed price as of Feb 2001.
 Assumed flat NOPAT @6%.
 Equates to sales growth @29%
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What Will Be The Stock Price?
OPTIMISTIC:
26% @ 7% NOPAT
 Continued growth with Do It Yourself
Business. Expand stores. Expand
categories.
 40% growth in Buy It Yourself
Customers.
 At least 25% growth with Professional
Customers. Large opportunity, high
margin.
 Stock Price= $60-$62
What Will Be The Stock Price?
PESSIMISTIC:
5% @ 6% NOPAT
 Some continued growth with Do It
Yourself Business via store expansions
& bundling.
 Moderate success in Buy it Yourself
Customers.
 Difficult to cross over with the
Professional Customer base.
 Stock Price= $11
What Will Be The Stock Price?
MOST LIKELY: 15% @ 6% NOPAT
 Some success with in Buy it Yourself
Customers. Less so with Professional
customers.
 Extension of products, services, and
stores- allows some growth with the Do
it Yourself Customers.
 Difficulties in trying to do it all.
 Share Price= $36
What Will Be The Stock Price?
OTHER FACTORS
 Even with all the right initiatives future
remains questionable.
 History: Very few companies can
sustain HD’s level of performance over
a long period.
 There may be limits to growth.
 After all, companies do trend toward the
overall economy.
What actually happened
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Management change Dec. 2000
 Feb
2001 changed focus to quality
Dec 2001 revised earnings down by ~40%
 July 2002 stock downgraded by M-L
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 Lowe’s
had outperformed for past 12 months
Aug 2002 began hoarding cash
 Nov 2002 revenue missed growth
predictions by ~50%
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And more…
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May 2003 6% increase in sales
 Revert
away from warehouse style stores
 Centralized shipping
 Continue to expect 18-20 % growth
Questions?