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Home Depot Case Study

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Bernie Marcus and Arthur Blank founded the Home Depot in 1978. Along with investment banker Ken Langone and merchandising guru Pat Farrah, the founder’s vision of one-stop shopping for the do-it-yourselfer came to existence when they opened the first two Home Depot stores on June 22, 1979, in Atlanta, Georgia. The first stores, at around 60,000 square feet each, were cavernous warehouses that dwarfed the competition and stocked 25,000 SKUs, much more than the average hardware store at that time. Empty boxes piled high on the shelves gave the illusion of even more product. in only one year they opened a 4th store in Atlanta and the company had annual sales of $22.3 million dollars. In only 10 years on its 10th anniversary Home Depot opened its 100th store in Atlanta.
I. Current Situation
The Home Depot is the fastest growing retailer in U.S. history. Home Depot is the largest home improvement retailer and the second largest retailer behind Wal-Mart in the United States based on net sales for the 2005 fiscal year. In 1981, the company went public on NASDAQ and moved to the New York Stock Exchange in 1984. The 1980s and 1990s spawned tremendous growth for the company, with 1989 marking the celebration of its 100th store opening. The company arrived in Canada with the acquisition of Aikenhead’s home improvement centers in 1994. In 2003 Home Depot opened its 100th Canadian store. Home Depot began flying its flag proudly in Mexico in 2001 through the acquisition of Total HOME. In 2006, the company extended its reach to China by acquiring The Home Way, a 12-store chain. Home Depot had over 40 acquisitions from 2001 to 2006 alone with 21 being completed in 2005.
In 2005 net sales increased 11.5% to $81.5 billion. According to the Home Depot management this was due from an increase in comparable stores sales of 3.8% and from new there newly acquired businesses. The retail stores average customer spending increased 5.6% to a record $57.98 per every transaction. Service revenue increased from $5 billion in 2004 to $5.8 billion in 2005. The company invested $3.9 billion in capital expenditures during fiscal 2005 for store modernization and technology as well as opening 179 new stores. The company also closed 22 stores during the 2005 year. At the end of the fiscal year the companies return on invested capital was 22.4% compared to 21.5% for fiscal 2004.
B. Strategic Posture 1. Mission
The Home Depot is still guided today by those values established by its founders: excellent customer service, taking care of people, entrepreneurial spirit, respect for all people, building strong relationships, doing the right thing, giving back to communities, and creating shareholder value. The founders viewed the structure of the company as an inverted pyramid, with stores and customers at the top and senior management on the bottom. Arthur demanded that associates take risks to succeed, saying, “It is your business, your division, your market, your store, your aisle and your customer.”

2. Objectives
The company’s goals to reach by 2010 * Compounded annual sales growth of 9%-12% * Compounded earnings per share growth of 10%-14% * 400-500 new store openings- adding over 40-55 million square feet. * Operating Margin increases 50-100 basis points * Cumulative operating cash flow of $50 billion * Cumulative capital expenditures of $17-20 billion * Grow Home Depot Supply sales to $23-27 billion

These numbers were based upon projected market opportunities evolving by 2010, which were: * $200 billion U.S do-it-yourself market * $110 billion services market (representing the labor component) * More than $250 billion international do-it-yourself market * More than $410 billion professional market

3. Strategies
Home Depot stores followed a simple three-pronged approach: * Good customer service * Everyday low pricing * Wide breadth of products

Home Depots Values
The Home Depot’s values guide the beliefs and actions of all associates on a daily basis. Our values are the fabric of the Company’s unique culture and are central to our success. In fact, they are our competitive advantage in the marketplace. Associate pride and our “orange blooded” entrepreneurial spirit are distinctive hallmarks of our culture. 1. Taking care of our people:
The key to our success is treating people well. We do this by encouraging associates to speak up and take risks, by recognizing and rewarding good performance and by leading and developing people so they may grow. 2. Giving back to our communities:
An important part of the fabric of The Home Depot is giving our time, talents, energy and resources to worthwhile causes in our communities and society. 3. Doing the right thing:
We exercise good judgment by "doing the right thing" instead of just "doing things right." We strive to understand the impact of our decisions, and we accept responsibility for our actions. 4. Excellent customer service:
Along with our quality products, service, price and selection, we must go the extra mile to give customers knowledgeable advice about merchandise and to help them use those products to their maximum benefit. 5. Creating shareholder value:
The investors who provide the capital necessary to allow our company to grow need and expect a return on their investment. We are committed to providing it. 6. Building strong relationships:
Strong relationships are built on trust, honesty and integrity. We listen and respond to the needs of customers, associates, communities and vendors, treating them as partners. 7. Entrepreneurial spirit:
The Home Depot associates are encouraged to initiate creative and innovative ways of serving our customers and improving the business and to spread best practices throughout the company. 8. Respect for all people:
In order to remain successful, our associates must work in an environment of mutual respect, free of discrimination and harassment where each associate is regarded as a part of The Home Depot team.
2010 Quick Facts * New CEO is Frank Blake appointed in 2007 * Only 2 members of the 2006 board are still serving * Stock price is currently 31.54 a share (March 10, 2010)
II. Strategic Managers
Board Of Directors * Gregory D. Brenneman- has been a director since 2000 and was the Chairman and CEO of Burger King Corporation.

* John L. Clendenin- has been a director since 1996 and was retired Chairman and CEO of BellSouth Corporation.

* Claudio X. Gonzalez- has been a director since 2001 and was Chairman and CEO of Kimberly-Clark de Mexico.

* Milledge A. Hart- has been a director since 1978 and was Chairman of DocuCorp International.

* Bonnie G. Hill- has been a director since 1999 and was President of B. Hill Enterprises.

* Laban P. Jackson Jr. - Has been a director since 2004 and was Chairman of Clear Creek Properties.

* Lawrence R. Johnston- has been a director since 2004 and was Chairman and CEO of Albertson’s.

* Kenneth G. Langone- has been a director since 1978 and was a co-founder of Home Depot.

* Angelo R. Mozilo- has been a director since 2006 and was Chairman and CEO of Countrywide Financial Corporation.

* Robert L. Nardelli- Has been a director since 2000 when he was hired as President and CEO of Home Depot.

* Thomas J. Ridge- has been a director since 2005 and was a member of Thomas Ridge LLC.

1. Top Management * Robert L. Nardelli- President and CEO since 2000

* Francis S. Blake- Executive Vice President of Business Development and Corporate Operations since March 2002.

* Joseph DeAngelo- Executive Vice President of Home Depot Supply since August 2005.

* Robert P. DeRodes- Executive Vice President of Information Technology and Chief Information Officer since Feburary 2002.

* Dennis M. Donovan- Executive Vice President of Human Resources since April 2001.

* Marvin R. Ellison- Northern Division President since January 2006.

* Frank L. Fernandez- Executive Vice President Corporate Secretary and General Counsel since April 2001.

* Carl C. Liebert III- Executive Vice President of the Home Depot Stores since August 2005.

* Bruce A. Merino – West Coast Division President since May 2000 and President of Expo Design Center since October 2005.

* Julian P. Raines- Southern Division President since February 2005.

* Thomas V. Taylor- Executive Vice President of Merchandising and Marketing since August 2005.

* Carol B. Tome- Executive Vice President and Chief Financial Officer since May 2001.

* Annette M. Verschuren- President of the Home Depot Canada since March 1996. * External Environment

* Natural Environment * Forestland coverage has grown by 1.5% from 1990-2005. * Scientific consensus on "endangered regions" of forestry. * Societal Environment * Economic
a. Not highly effected by the recession. (O)
b. Business is seasonal. (T) * Technical * Developments in technology. (O) * Internet became increasingly important as a distribution channel. (O) * Political- Legal * Acquired Total Home, a Mexican home-improvement chain, in 2001. (O) b. Agreement to lease commercial office space in Shanghai. (O) * Sociocultural * Rising interest rates. (T) * Increasing gasoline prices during spring and summer. (T) * Housing turnover had slowed down. (T) * High level of U.S. homeownership in 2006. (O) * Task Environment * Stores continue to become modernized. (O) * Primary retail business expanded into multiple channels. (O) * Expanding the market to open stores in new countries. (O) * Rivalry is low. (O) * Buyers' power is low. (O) * Suppliers' power is low. (O) * Distributors' power is high. (O) * Threat of substitutes is low. (O) * Entry barriers are high. (O)

* Internal Environment * Corporate Structure * Legally a set of companies composed of two business segments; retail and supply. (S) * Organized and managed by geographic region. (S) * Corporate Culture * 98% of 170 top executives left since 2001. (W) * 56% of headquarters personnel hired outside of company. (W) * Demoralized Staff. (W) * Centralized organization. (S) * Corporate Resources * Marketing * Broad assortment of high-quality merchandise at services at low prices. (S) * Uses major sponsorships. (S) * Uses various media to maintain an aggressive campaign. (S) * Finance * Net sales increased 11.5% in 2005. (S) * Earnings per share increased from $1.10 to $2.72 in 2005. (S) * Long-term debt-to-equity was 24.5% end of second quarter in 2006. (W) * Common stock fell 30% from 2000 to 2006. (W) * R & D * 88,000 square-foot innovation center for testing. (S) * Tested new and radically new product categories and store designs. (S) * Operations * End of 2005, 40% of merchandise shipped to Home Depot stores was processed through the company's network of distribution and transit facilities. (S) * Developed the concept of all-in-one discount warehouse home improvement superstore. (S) * Human Resources * Committed to promotions from within. (S) * Proprietary automated system for identifying the best candidates for store sales associate positions. (S) * Emphasizes importance of the individual to the success of the company's operations. (S) * Information Systems * Each store as computerized point-of-sale systems, electronic bar code scanning system, and a UNIX server. (S) * In 2005, Home Depot completed an installation of back-end-scanned receiving to all U.S. and Canadian stores. (S)
V. Analysis of Strategic Factors A. Situational Analysis (SWOT) 1. Strengths a. Economies of warehouse formatted stores b. High customer service, knowledgeable employees c. Number of stores, customer accessibility d. Brand recognition, largest home improvement retailer e. Variety and range of high quality products
f. Recession proof (bad economy: upgrade homes; good: build new homes)
g. Orange blooded” culture, individuality, entrepreneurial spirit, high morale h. Community involvement, $40 million in 2005 to non-profit 2. Weaknesses a. Change of management by Nardelli’s to military style of leadership
b. Culture of fear, making sales targets instead of experienced decision-making c. Employee turnover high in new store (60-70%) and years later (30%) d. Rapid growth in number of stores did correlate to higher margins e. Big box store reputation with local communities 3. Opportunities
a. Target markets (DIY, Services, DIFM, Professional, International = 900 billion) b. International market is a huge potential c. Rapid Deployment Centers, speed up distribution to reduce wait time
d. Baby Boomers, Do-It-For-Me customers, additional revenue from installation
e. Getting back to “orange blooded” culture with high moral, customer service 4. Threats
a. Economy fluctuation, sold EXPO décor and HD Supply, which provided growth b. Lowe’s growing and expanding, catching up to Home Depot c. Regional chains like Menards and other smaller chains and suppliers d. Market saturation, hard to differentiate B. Review of Current Mission and Objectives
1. Current mission seems appropriate, reduced costs and vulnerability by selling two important businesses (EXPO and HD Supply), may hurt them in the professional market but will allow for a more constant and projected revenue base 2. Objectives are to grow internationally, offer more environmentally friendly products, and improve margins with new technology * Strategic Alternatives and Recommended Strategy

A. Strategic Alternatives
1. Enforce Mandatory Training: As customer service declines, and more part time inexperienced workers are hired mandatory training would counter balance lack of knowledge. a. [Pro]: Customer service would increase and much needed change will come to corporate culture. b. [Con]: Home Depot is motivated by money currently and this would be an expense. 2. Recentralize the Management: Company morale is currently low because of the instructions coming from upper management down. a. [Pro]: Employees will feel more valued because their opinion will be heard. b. [Con]: The company environment was already intensely modified a 2005 and another modification could cause confusion and unhappiness.
3. Experts on Staff: Cut backs have caused the Home Depot to eliminate support staff which has cause customers to have lack of expert advice. a. [Pro]: Customers will have sufficient knowledge of the product they are purchasing decreasing unsatisfied customers.
b. [Con]: Expertise is a costly feature.

B. Recommended Strategy
Home Depots mission statement involves having excellent customer service. Due to the 2005 changes the policy has turned into an idea. In order to reestablish this objective into a policy we are recommending mandatory training. 1. Recommend mandatory training upon employment because Home Depot would not only increase customer service with staff having knowledge of the products, the staff will also be vested in the company having put in training hours.

VII. Implementations
1. Prepare to service contractors and homebuilders for the potential housing market turn-around in order to be ready in the market upon this transition
2. Implement a new corporate culture that focuses on a friendly approachable atmosphere to better compete with that of Lowes who is Home Depot’s biggest competitor
3. Hire more board members with an international business focus to help expand Home Depot globally and into new markets.

VIII. Evaluation and Control
1. Home Depot must decide on what type of corporate culture works well among all employees and make sure they implement it company-wide
2. More analysis should be done on opportunities such as RDC’s to determine whether or not they have potential to boost business and expand market share.

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...Accounting/Financial Analysis Of Lowe's Inc. Lowe’s is the world’s second largest home improvement retailer and operated 952 stores in forty five states at their fiscal year ending January 30, 2004. The company is currently in the midst of the most aggressive expansion in its history with 130 new stores opened in 2003 and another 140 slated for this year. Lowe’s saw 2003 sales reach approximately $30.8 billion, due largely to their focus on the retail customers and home-improvement projects. Fifty eight years ago Lowe’s began as North Wilkesboro Hardware Company, a neighborhood hardware store fittingly named after the small town it was located in. Owned by partners H. Carl Buchan and James Lowe, this concept was more than a living, it was a vision of creating a chain of hardware stores. The concept was easy and straight forward. Lowe’s concentrated on selling only hardware, appliances and hard-to-find building materials while eliminating wholesalers and dealing directly with manufacturers to establish a reputation of offering the lowest prices. The company went public in 1961 and began trading on the New York Stock Exchange in 1979 (NYSE:LOW). In 1982, Lowe’s had its first billion-dollar sales year, earning a record profit of $25 million, establishing them as an industry force. Lowe’s has posted extremely strong numbers in the past few years and the company has grown rapidly, swelling it’s store base from 500 to over 950. Sales have increased an average of 20% per......

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Home Depot

...of the number of covenant which restrict the magnitude of the company future borrowing, Home depot is very limited to improve its financial leverage in order to increase its performance. In addition the gearing (debt net to equity) is already very high. Related to this we can assume that if in any case the bank accepted to rise a new debt, the marginal cost of this new debt might be more important than the operating ROA. Therefore, this debt rising would have an opposite effect on the company performance and the ROE would decrease. In order to increase the company’ performance, we advise Home Depot to be focus on its Operating ROA. Operating ROA : EBIT/Sales x Sales/Assets Sales/Assets : Sales/ Fixed Assets + Sales/NWC (Sales/Inventory + Sales/accounts receivable – (Sales/accounts payable) First, we advise the company to slow its growth in order to reduce its Assets. In order to do it the company should be focus on its NWC management by purchasing with suppliers for a longer delay of payment or implementing a new payment policy for its customers. Inventory would be difficult to reduce due to the business model of Home Depot. Also the company can reduce its fixed assets with a sell and leaseback transaction. In addition to increase the company’s performance, the sales and leaseback transaction would give the opportunity to get some cash and invest in new projects. Second, Home depot should increase the ratio EBIT/Sales by...

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