Home Depot (HD)

The Home Depot Stores

Operating Strategy.    Our operating strategy is to offer a broad assortment of high-quality merchandise and services at competitive prices using knowledgeable, service-oriented personnel and strong marketing and credit promotions. We believe that our associates' knowledge of products and home improvement techniques and applications is very important to our marketing approach and our ability to maintain and enhance customer satisfaction.

Customers.    The Home Depot stores serve three primary customer groups:

•

Do-It-Yourself ("D-I-Y") Customers: These customers are typically home owners who purchase products and complete their own projects and installations. To complement the expertise of our associates, The Home Depot stores offer "how-to" clinics taught by associates and merchandise vendors.



•

Do-It-For-Me ("D-I-F-M") Customers: These customers are typically home owners who purchase materials themselves and hire third parties to complete the project and/or installation. We arrange for the installation of a variety of The Home Depot products through qualified independent contractors.



•

Professional Customers: These customers are professional remodelers, general contractors, repairmen and tradesmen. In many stores, we offer a variety of programs to these customers, including additional delivery and will-call services, dedicated staff, extensive merchandise selections and expanded credit programs, all of which we believe increase sales to this group.

2

Products.    A typical The Home Depot store stocks 35,000 to 45,000 products during the year, including both national brand name and proprietary items. The following table shows the percentage of revenues of each major product group (and related services) for each of the last three fiscal years:

We buy our store merchandise from suppliers located throughout the world and are not dependent on any single supplier. Most of our merchandise is purchased directly from manufacturers, which eliminates "middleman" costs. We believe that competitive sources of supply are readily available for substantially all of the products we sell in The Home Depot stores.

To complement and enhance our product selection, we have formed strategic alliances and exclusive relationships with selected suppliers to market products under a variety of well-recognized brand names. During fiscal 2005, we offered a number of proprietary and exclusive brands across a wide range of departments including, but not limited to, Behr Premium Plus® paint, Charmglow® gas grills, Hampton Bay® lighting, Mills Pride® cabinets, Vigoro® lawn care products, Husky® hand tools, RIDGID® and Ryobi® power tools, Pegasus® faucets, Traffic Master® carpet, Glacier Bay® bath fixtures and Veranda® decking products. We may consider additional strategic alliances and relationships with other suppliers and will continue to assess opportunities to expand the range of products available under brand names that are exclusive to The Home Depot.

In 2005, innovative and distinctive products continued to be a growth driver supporting our merchandising strategy. The following successes helped differentiate The Home Depot in the marketplace:

•

An enhanced grill lineup led by our proprietary Charmglow® brand and the exclusive Ducane Stainless Steel Grills;



•

Flooring innovation through our DuPont RealTouch Elite Laminate Flooring;



•

Introduction of LG appliances and a broadened assortment of Maytag and GE products;



•

Expanded patio lineup led by our proprietary Hampton Bay® set;



•

Broadened assortment of paint, including Colores Origenes, Bellagio faux paint, and the Ralph Lauren metallic and suede paint;



•

Innovative products from Ryobi®, including the Ryobi One+ System™, Ryobi Multitaskit™ and Ryobi Gas Pressure Washer; and



•

Growing power tool lineup, including the introduction of exclusive Makita and Milwaukee lithium-ion power tools for professional and D-I-Y customers.

We maintain a global sourcing merchandise program to source high-quality products directly from manufacturers. This gives our customers a broader selection of innovative products and better value, while enhancing our gross margin. Our product development merchants travel internationally to identify opportunities to purchase items directly for our stores. Additionally, we have two sourcing offices located in Shanghai and Shenzhen, China, and have a quality assurance engineer located in Milan,

3

Italy. We also have product development merchants, as well as a sourcing office, in Monterrey, Mexico. These initiatives enable us to improve product features and quality, to import products not currently available to our customers and to offer products at a lower price than would otherwise be available if purchased from third-party importers. We currently source products from more than 600 factories in approximately 35 countries.

Services.    The Home Depot and EXPO Design Center stores offer a variety of installation services. These services target D-I-F-M customers who select and purchase products and installation of those products from us. These installation programs include products such as carpeting, flooring, cabinets, countertops and water heaters. In addition, we provide professional installation of a number of products sold through our in-home sales programs, such as generators and furnace and central air systems. Our wholly-owned subsidiaries, THD At-Home Services, Inc. and Home Depot Installation Services, Inc., sell and install our roofing, siding and window programs. With the exception of Home Depot Installation Services, Inc., which employs its own qualified installers, The Home Depot's installation services are provided by qualified independent contractors throughout the U.S. and Canada. We also arrange for the provision of flooring, countertop, cabinet and window covering installation services to production home builders through our Creative Touch Interiors brand. During the fourth quarter of fiscal 2005, we extended our services business by acquiring Chem-Dry, the world's largest carpet and upholstery cleaning franchisor. Chem-Dry has nearly 4,000 franchises worldwide, including 2,500 in the U.S.

Home Depot Stores

Operating Strategy.    The operating strategy of Home Depot is to offer a broad assortment of high-quality merchandise and services at competitive prices using knowledgeable, service-oriented personnel and strong marketing and credit promotions. We believe that our associates' knowledge of products and home improvement techniques and applications is very important to our marketing approach and our ability to maintain and enhance customer satisfaction.

Customers.    Home Depot stores serve three primary customer groups:

•

Do-It-Yourself ("D-I-Y") Customers:    These customers are typically homeowners who purchase products and complete their own projects and installations. To complement the expertise of our associates, Home Depot stores offer "how-to" clinics taught by associates and merchandise vendors.



•

Do-It-For-Me ("D-I-F-M") Customers:    These customers are typically homeowners who purchase materials themselves and hire third parties to complete the project and/or installation. We arrange for the installation of a variety of Home Depot products through qualified independent contractors.

2

•

Professional Customers:    These customers are professional remodelers, general contractors, repairmen and tradesmen. In many stores we offer a variety of programs to these customers, including additional delivery and will-call services, dedicated staff, extensive merchandise selections and expanded credit programs, all of which we believe increase sales to this group.

Products.    A typical Home Depot store stocks 40,000 to 50,000 products during the year, including both national brand name and proprietary items. The following table shows the percentage of revenues of each major product group (and related services) for each of the last three fiscal years:

We buy our store merchandise from suppliers located throughout the world. We are not dependent on any single supplier. Most of our merchandise is purchased directly from manufacturers, which eliminates "middleman" costs. We believe that competitive sources of supply are readily available for substantially all of the products we sell in Home Depot stores.

To complement and enhance our product selection, we have formed strategic alliances and exclusive relationships with certain suppliers to market products under a variety of well-recognized brand names. During Fiscal 2004, we offered a number of proprietary and exclusive brands across a wide range of departments including, but not limited to, John Deere® lawn and garden tractors; Thomasville® kitchen and bathroom cabinets; Silestone® countertops; RIDGID® power tools; Behr Premium Plus® paint; Mill's Pride® cabinets; Husky® hand tools; GE SmartWater™ water heaters; Philips® light bulbs; Toro® lawn mowers; Vigoro® lawn care products; GAF® roofing products; Honda® lawn mowers and Lithonia Lighting™ fluorescent lighting products. We may consider additional strategic alliances and relationships with other suppliers and will continue to assess opportunities to expand the range of products available under brand names that are exclusive to The Home Depot.

We maintain a global sourcing merchandise program to source high-quality products directly from manufacturers. This gives our customers a broader selection of innovative products and better value, while enhancing our gross margin. Our product development merchants travel internationally to identify opportunities to purchase items directly for our stores. Additionally, we have two sourcing offices located in Shanghai and Shenzhen, China, and have a product development merchant located in Bonn, Germany. We also have product development merchants, as well as a sourcing office, in Monterrey, Mexico. These initiatives enable us to improve product features and quality, to import products not currently available to our customers and to offer products at a lower price than would otherwise be available if purchased from third-party importers. We currently source products from more than 600 factories in approximately 35 countries.

Services.    Home Depot stores offer a variety of installation services. These services target D-I-F-M customers who select and purchase materials for a project and then arrange for professional installation through the Company. Our installed sales programs use only qualified independent contractors throughout the U.S. and Canada. These programs include the installation of products that are sold in our stores, such as carpeting, flooring, cabinets, water heaters and countertops, as well as other products such as generators and furnace and central air systems.

3

Store-Related Programs.    We continually assess our business to find opportunities to increase customer loyalty, thereby increasing sales. Accordingly, we implemented or expanded a number of in-store initiatives in Home Depot stores and programs aimed at supporting store operations during Fiscal 2004, including:

•

Professional Business Customer Initiative. We are committed to being the supplier of choice to a variety of professional customers, including remodelers, carpenters, plumbers, painters, electricians, building maintenance professionals and designers. During Fiscal 2004, we continued to expand our "Pro" initiative, which adds service-related programs to our stores that are designed to increase sales to professional customers. Stores participating in the program have added associates at a sales desk dedicated to providing more personalized service to professional customers, including managing accounts and taking and filling orders for pick-up or delivery. Additionally, during the hours when professionals typically shop, these stores have assigned sales associates in certain departments to better assist these customers. We have also increased the available quantities of products typically purchased by professionals in bulk, and we offer certain items in each department packaged in bulk to provide additional savings. While aimed at the professional customer, this program also enables us to provide D-I-Y customers with improved customer service, including delivery and will-call services, expanded credit programs and additional merchandise. Through this initiative, we have identified best practices in serving our professional customers that are being implemented in many of our stores without material additional costs. By the end of Fiscal 2004, we had expanded the Pro initiative into 1,563 stores, 207 of which were added during the year. We anticipate that during Fiscal 2005, we will expand this initiative to approximately 165 additional stores, including new stores.



•

Appliance Sales. During Fiscal 2004, we continued the roll-out of our appliance sales program on our web site and throughout our stores in the U.S. Through this program we sell appliances manufactured by General Electric®, Maytag® and other leading manufacturers. We display and stock the more popular appliances in our stores and offer the ability to special order approximately 2,300 additional products through computer kiosks located in stores. Through the computer kiosks we can check inventory and arrange for delivery to the customer directly from the manufacturer as soon as 48 hours after the order is placed. Appliance showrooms were in 1,787 of our stores at the end of Fiscal 2004, and we anticipate adding the appliance sales program to an additional 165 stores by the end of Fiscal 2005.



•

Designplace Initiative. We continued to implement our Designplace® initiative during Fiscal 2004, rolling the initiative out to an additional 162 stores and bringing the total to 1,787 stores at the end of Fiscal 2004 from 1,625 stores at the end of Fiscal 2003. This initiative offers an enhanced shopping experience to our design and décor customers by providing personalized service from specially-trained associates and enhanced merchandise selection in an attractive setting. We expect to add the Designplace initiative to 165 additional stores during Fiscal 2005.



•

Tool Rental Centers. As part of our efforts to satisfy a broad range of the needs of our professional and D-I-Y customers, we offer a tool rental center in certain stores. We rent approximately 350 commercial-quality tools and equipment in 12 categories, including saws, floor sanders, generators, gas powered lawn equipment and plumbing tools. Customers can rent the tools on an hourly, daily, weekly or monthly basis. Our associates who work in the tool rental center receive special training in the use and maintenance of tools. At the end of Fiscal 2004, we had tool rental centers in 1,061 stores compared to 825 stores at the end of Fiscal 2003. By the end of Fiscal 2005, we anticipate having tool rental centers in approximately 1,186 stores. We believe that offering this service increases the sales of related merchandise without reducing the sales of equipment similar to that available for rental.



•

Customer Contact Center. Since Fiscal 2001, we have had a customer contact center to assist with expediting special orders and managing installation projects. The customer contact center also

4

supports the sale and installation of roofing, siding, windows, water heaters, gutters, fencing and HVAC equipment nationwide. Calls come into the center where customer service representatives assist customers with product selection and scheduling installations. The orders are then fulfilled through our stores or by third-party service providers. During 2005, we anticipate opening an additional customer contact center to support approximately 500-750 additional stores. We believe that customer contact centers help us provide better customer service, both in our stores and on the phone, while reducing costs.

•

Customer Education Programs. We offer several programs to enhance the skills of our D-I-Y customers. Our associates and vendors teach "how-to" clinics that focus on D-I-Y projects, such as installing garbage disposals, laying patio pavers or building a deck. In addition to the clinics, we offer Home Depot University®, which presents four-week modules allowing our customers to learn about several facets of a home improvement topic. For example, a room enhancement module may provide instruction on paint, wallpaper and window treatments. Through The Home Depot's Kids Workshop^SM program, children are instructed in tool safety and complete a small building project, such as a birdhouse or tool box. We believe that these types of educational programs increase our sales by encouraging our customers to undertake more projects, differentiating us from our competition and reinforcing our position as experts in home improvement.