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Home Depot (HD)Stock (Home Improvement & Furnishings Industry, Real Estate Industry, Retail Industry)
 This article should cite more sources.  HD Supply, the segment that catered to professionals, contributed nearly 80% of all revenue growth for Home Depot from 2005 to 2006, and until reports confirmed its sale, was expected to drive a large portion of the company's future growth. However, despite a disappointing price of only $8.5 billion, selling HD Supply may not have been a bad idea--while the professional supply business offers strong revenue growth opportunities, it also generated lower operating margins than retail (5-8% to retail's 8-12%). Also, the HD Supply business was even more exposed to changes in the housing market than some parts of Home Depot's traditional retail business. With the sale of HD Supply, the Home Depot lost a significant source of sales allowing its main competitor, Lowe's Companies (LOW) to catch up in terms of net sales. Lowe's has been outperforming Home Depot along several key metrics in recent years. In same store sales growth, Lowe's has consistently been ahead for the past four years. And while Home Depot has historically held the higher profit margins, in 2006, Lowe's pulled ahead by a hair, at 10.7% versus 10.6%. However, Home Depot won back the advantage in this metric in 2007 as its operating margin fell to 9.4% as Lowe's operating margin dipped to 5.8%. Like all home improvement retailers, Home Depot is very vulnerable to macroeconomic changes in the US housing market. Recent increases in interest rates, the continued housing market slowdown which has accelerated due to the recent subprime mortgage crisis in the financial industry have been a major factor behind Home Depot's recent struggles. For the fiscal 2007 year ended in February 2008, Home Depot's net sales decreased 2% from 2006 to $77 billion as same store sales decreased 6.7% for the year. The sale of HD Supply, which is even more sensitive to the housing market, may be part of a general effort to stabilize Home Depot's fortunes. Growing international operations in Canada, Mexico and China may also buffer Home Depot's exposure to the domestic US market. Home Depot still has plans to continue expanding their store base within the U.S. and abroad, but due to market conditions the company announced in early May that it was pausing some of its expansion plans, including plans to open 50 new stores in the U.S., and closing several underperforming stores. The company will also be cutting about 1,300 of its 331,000 employees as part of these cutback plans. As of the end of the first quarter of FY08, Home Depot had closed 15 stores as part of this plans and management has stated that it is dedicated to allocating capital in a "disciplined" manner. The company continued to struggle through the first quarter of 2008, with net sales decreasing 3.4% and same store sales decreasing 6.5% as poor conditions in the housing market and general economy continued to dampen the retailer's ability to sell home improvement goods. 
[edit] Company OverviewHome Depot started in 1978 and has since grown rapidly into one of the largest retailer in the U.S. with $77 billion in 2007 sales. The company reached $1 billion in sales by 1986, and had expanded internationally into Chile and Argentina. In 2001, it sold out its operations in Chile and Argentina; today, Home Depot operates in the US, Canada, Mexico and China. [edit] Stores and ProductsHome Depot provides a wide range of home building supplies (35,000 to 40,000 products per store) and services to its target customers. Most retail outlets are big-box stores averaging around 125,000 square feet of retail space (100,000 sq ft enclosed sales floors and 25,000 sq ft of garden areas outside).  Source: Company Reports [edit] Customers[edit] RetailHome Depot's retail operations generated $77 billion in 2007 revenue, a decrease of 2% compared to 2006. The company caters to three main types of retail customers:
[edit] HD Supply SoldHome Depot's HD Supply business that served professional and industrial customers was sold to private equity investors for $8.5 billion--18% less than the price Home Depot had originally hoped to receive, before the subprime lending crisis damaged the health of the credit markets. The HD Supply division provided a wide range of products and services to builders, contractors, government organizations, industrial businesses and maintenance professionals. This business unit accounted for $12.1 billion in 2006 sales, an increase of 162% compared to the previous year. HD Supply accounted for nearly 80% of the total growth of the company from 2005 to 2006. The sale of HD Supply may help to limit the company's total exposure to fluctuations in a dangerously volatile housing market, but it also cuts off a large potential growth opportunity. [edit] Trends and Forces[edit] Housing/Interest Rates
In the past, a high correlation has existed between the rate of home purchases and buildings and interest rates. As interest rates fall, prospective home owners and builders can borrow money less expensively and therefore will be more likely to do so. When more homes are built and purchased, Home Depot's sales to homebuilders and re-modelers increase. On the flip side Home Depot's same store sales growth numbers reflect a housing slowdown in 2006. It should be noted that housing booms do not always occur when interest rates are low. This is especially true in the case of a geographic area housing boom. There are many reasons for such booms (e.g., a company may move to an area, providing a boon through new jobs creation). Because Home Depot has widespread locations throughout the U.S., they are in position to take advantage of such booms. Also, the housing market has been struggling recently as a result of the credit crunch that began this summer in the financial industries with fallouts on subprime mortage-backed securities. [edit] Private and Proprietary BrandsEach Home Depot store stocks a mix of proprietary brands exclusively sold by Home Depot and national brand name items sold by other retailers and suppliers. Some notable brands unique to Home Depot include: Charmglow (gas grills), Husky (hand tools), and Ryobi (power tools). The contracts that give Home Depot exclusive rights to sell certain brands generate dual value, especially in regards to the professional customer base.
[edit] Increase in Number of DIFM CustomersAs the demographics of the U.S. change, specifically baby boomers getting older, this category of customers should become a larger portion of the total. This is good for Home Depot because they reap additional profit in this segment from installation charges that they do not accrue from DIY (do-it-yourself) customers. [edit] Store ExpansionHome Depot operated 2,258 stores in the U.S., Canada, Mexico and China at the end of the first quarter of the 2008 fiscal year.
Home Depot holds a head start in global expansion compared to its main competitor, Lowe's, whose international operations amount only to 6 stores in Canada which were opened in 2007. In 2006, China's rapid economic growth prompted Home Depot to purchase The Home Way, a Chinese home improvement retailer. This acquisition, with its 12 store locations, has allowed Home Depot to enter an international market that many consider to be booming. [edit] Economies of ScaleDue to Home Depot's size and network of stores, they maintain large inventories of items through a store/warehouse system. Some larger stores are used as distribution points and it is common for stores within a geographic area to leverage others' inventory. This flexible inventory management system decreases wait times for customers and effectively offers a wider array of products. This is one of Home Depot's distinct competitive advantages and demands a complex network system of transportation, warehouse space, and extensive back office operations that take care of inventory shifts and order execution. Many firms do not have the scale to justify these additional costs. [edit] Competition
[edit] Operating Metrics
Sales do not tell the whole Lowe's and Home Depot story. Lowe's has outpaced the market leader recently along key metrics of same stores sales growth and operating margin growth. In addition, Lowe's may see accelerated growth from as it began to expand internationally in 2007: [edit] Same Store Sales Growth Lowe's has consistently been ahead of Home Depot in same store sales growth for the past four years. Same store sales growth lends the best comparison of sales growth between the two companies by looking at the same stores year over year for both companies. By doing this it does not allow new store openings to affect the comparison. [edit] Operating MarginLowe's had been behind Home Depot in terms of operating margins for several years until 2006 when Lowe's won a slight advantage over Home Depot. However, Home Depot surpassed Lowe's again in 2007 as Home Depot's operating margin fell to 9.4% compared to Lowe's 5.8% mark in 2007. [edit] International MarketsHome Depot has over 240 stores outside of the US (mostly in Canada and Mexico) which contributed over $5 billion to total revenue in 2006. This is a small portion of their total sales, but Lowe's, on the other hand, just expanded internationally with 6 new stores in Canada in 2007. Lowe's hopes to continue this expansion to catch up to Home Depot's global sales. One key driver of the difference in recent operating performance may be Lowe's store environment, which is often noted to be more more customer friendly than Home Depot's. Consumers wanting less of a "warehouse style" home improvement retailer often choose Lowe's over Home Depot. This is especially true for the lucrative, growing DIFM customer base. Home Depot is taking steps to incrementally improve the customer experience by:
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