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

HOME DEPOT Inc.

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

Lowes 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 Depots 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

Current Situation

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 companys future strategic direction Economy had experienced uninterrupted growth since 1992

Trivia Time with Todd!

What proportion of the worlds 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

Growth Initiatives Classroom Opinions

Buy it Yourself customers Professional customers Store format changes Product category expansion International growth Internet sales

Growth Initiatives Buy-it-Yourself Customers

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

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.

Growth Initiatives Product Categories

Increasing product lines Adding appliances to complement current offerings Vertically integrate supply chain Tool rentals and truck rentals

Growth Initiatives International Growth

Expansion into South America Joint venture in Chile Looking into expansion into the Far East

Growth Initiatives Internet Sales

Information centre for customers Adding e-commerce abilities Intended to complement brick stores

Talk Time with Tom!

Small groups 10 minutes Evaluate each initiative individually Report back to us

Growth Initiatives Buy-it-Yourself Customers

Excellent opportunity! Service will be key for this segment

Growth Initiatives Professional Customers

Another opportunity! Largest and most profitable market Complement to the existing business

Growth Initiatives Store Formats

Bad idea! Different business plan Doesnt fit well with current strategy and business plan

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?

Growth Initiatives International Growth

Bad idea! Risky, risky, risky Saturate N. American market first Joint venture was the best method for entering this market

Growth Initiatives Internet Sales

Hard to set up Expensive to maintain Peak of the dotcom boom Catalogue site, not order site

Financial Analysis
Ratios Return on Equity Return on Assets 2000 26.50% 22.60% 1999 22.70% 19.70% 1998 19.50% 17.40%

Cash Flow Cash Flow from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities Cash and Equivalents EOY 2446 -2622 281 168 1917 -2271 248 62 1029 -971 -32 172

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%

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 HDs 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

Management change Dec. 2000

Feb

2001 changed focus to quality

Dec 2001 revised earnings down by ~40% July 2002 stock downgraded by M-L
Lowes

had outperformed for past 12 months

Aug 2002 began hoarding cash Nov 2002 revenue missed growth predictions by ~50%

And more

May 2003 6% increase in sales

Revert

away from warehouse style stores Centralized shipping Continue to expect 18-20 % growth

Questions?