Introduction
Home Depot, Inc. (HD) is a home
improvement retailer that provides consumers with home improvement and lawn
care products, building materials, equipment rental, and installation
services. The Home Depot, Inc. was
established in 1978, and it is operated out of Atlanta, Georgia (Yahoo
Finance). The initiation of the 2008 economic recession and the crash of the
housing bubble had an adverse effect on the entire home improvement retailing
industry, as well as Home Depot’s sales.
However, the organization has been able to make a strong recovery, and
is the world’s largest home improvement retailer.
Home Improvement Retailing Industry
The home improvement retailing
industry consists of large home centers and hardware stores that may provide
products and services. According to
Charles Hill and Gareth Jones’, Strategic
Management: An integrated approach, Porter’s model for analyzing an
industry consists of five components.
These are the risk of entry by potential competitors, the bargaining
power of buyers, the bargaining power of suppliers, the threat of substitutes,
and the amount of rivalry between established firms in the industry.
In the home improvement retailing
industry the risk of entry by potential competitors is a low force. The top two companies in the U.S. home
improvement retailing industry are The Home Depot and Lowe’s (Hoover’s Inc.,
2011). These companies have established
economies of scale through centralized purchasing. Home Depot and Lowe’s also have strong brand
names and each provide specific brand-name products that have established
consumer loyalty. Customer switching
costs should not be a major issue in this industry due to the low-cost prices
offered by the main competitors in the industry. The top firms in the industry have absolute
cost advantages based on their accrual of experience, supplier relationships,
and ease of access to capital (Hoover’s, 2011).
Consequently, the risk of new entrants in the industry is low.
Rivalry in the home improvement
retailing industry is strong. The
industry is dominated by Home Depot and Lowe’s, but it is fragmented due to the
high number of competitors and the vast variety of products and services
(Sunita, 2010). Competitors in the
industry include electrical, plumbing, and building supply stores. Other competitors are specialty design
stores, discount stores, independent building supply stores, and even other
retailers such as Wal-Mart and Sears (Home Depot, 2011). Industry demand is
predicted to increase as the large Generation Y enters into the housing market
and begins spending on do-it-yourself home projects. Also, demand is currently increasing as
homeowners begin home-improvements which were set aside during the economic
slump and the bursting of the housing market bubble. The increase in demand should moderate the
strength of competition in the industry.
However, the industry maintains high fixed costs for capital leases,
buildings, land, and employee salaries which heightens the rivalry among
competitors for the greatest sales volume (Joint Center for Housing Studies,
2011). Therefore, rivalry in this
industry is strong.
The threat of substitutes in the
home improvement retailing industry may be considered low. The products and services provided really are
not ones that have any close substitutions.
While tea may be considered a substitute for coffee, there is no close
substitute for paint, drywall, or other home improvement supplies or
services. The only product which may
really be considered a substitute would be a new house. A substitute for services provided would be
more customers choosing to perform their own installations of products by
educating themselves on the necessary procedures (Sunita, 2010). In spite of this, these consumers will most
likely still make their product purchases within the industry. Hence, the threat of substitutes is a low
force.
The bargaining power of suppliers is
a low force in the home improvement retailing industry. Companies such as Home Depot and Lowe’s depend
upon products from well-recognized brand-name suppliers. If these firms are unable to maintain their
strategic alliances and exclusive relationships with certain suppliers they
might lose their product differentiation which attracts some customers. In addition, these companies have some
reliance upon third-party suppliers. If
these third-party suppliers were to run into financial or regulatory
difficulties or for some reason be unable to uphold their side of an agreement
there would be a negative impact on the companies in the industry. However,
these firms maintain the majority of control over their own supply chains by
eliminating the middlemen such as distribution centers. Also, as a leader in the industry, Home Depot
has an online center, workshops, and scorecards for suppliers. This aids Home Depot in minimizing the
control of its suppliers (The Home Depot, 2011). Lowe’s also utilizes a supplier website for
building and strengthening supplier relations (Lowe’s, 2011). These activities limit supplier bargaining
power to a low force.
The bargaining power of buyers or
consumers is a strong force. There are
three types of consumers for the home improvement retailing industry. There are the do-it-yourself customers,
buy-it-yourself customers, and professional contractors. The number of competitors in the industry is
relatively high granting greater bargaining power to the buyers. Consumer tastes, preferences, and
expectations influence consumers’ demands for products and services (The Home
Depot, 2011). This in turn increases the
bargaining power of buyers. Yet, as long
as the industry is able to anticipate and properly respond, consumers will have
a lower bargaining force. In turn, this
is why businesses in the industry place such a strong emphasis on customer
consultation, customer service, consumer experience, and maintaining a strong
consumer base. The bargaining power of
consumers is a stout force in the industry.
Utilizing Porter’s five forces model
this analysis illustrates that the home improvement retailing industry’s
environment is currently an opportunity for established companies such as
Lowe’s and Home Depot. There is a low
threat for new entrants in the industry, substitutes, and bargaining power of
suppliers. While rivalry and consumer
bargaining power are strong forces in the industry, the established companies
have a competitive advantage based on low-cost structures, economies of scale,
and brand loyalty.
Strategy
In the 1990’s, Home Depot followed a
differentiation business model. It
focused on distinguishing itself from the competitors with knowledgeable,
helpful employees, brand-name products, and a unique customer experience
(Brown, 2007). As the home improvement
retailing industry matured and became less fragmented, Home Depot recognized
the need for a new strategy to maintain a competitive advantage and increase
profitability. Therefore, Home Depot’s
top management team decided to implement a cost-leadership strategy (Brown,
2007). Home Depot also utilized a
chaining strategy to achieve cost advantages and consolidate the industry. It established networks of connected retail
stores which helped them control their supply costs (Hill & Jones, 2008).
The cost-leadership strategy The Home
Depot adopted allowed it to lower its cost structure and improve operating
performance. This has enabled Home Depot
to be more profitable than Lowe’s and other competitors, such as Menards. Another benefit of the cost-leadership
strategy is that Home Depot is able to charge a lower price which attracts more
customers and increases its competitive advantage (Corral, 2010). The Home Depot has been able to “destroy
brands and transform entire products into low-margin commodity markets (Schwalm
& Harding, 2000).”
Within its cost-leadership model, The
Home Depot has established a “three-pronged strategy to boost business this
year and onward (Corral, 2010).” It is
specifically concentrating on supply-chain transformation, merchandise
transformation, and customer service.
According to Marvin Ellison, evp, U.S. stores, the three-pronged
strategy creates great value for Home Depot while instituting product authority
(Corral, 2010). Along with this, “Home
Depot is shifting its model to cater to do-it-yourself customers” by changing
its “product-mix in stores to focus on smaller projects” since the “money is in
small projects that homeowners can accomplish themselves over one or two
weekends without breaking their bank accounts (Peterson, 2011).” Home Depot wants to improve customer service
and simplify store operations.
Actions
According to Corral, “The supply chain
transformation relates to the rollout of company’s new rapid deployment centers
(RDC) (2010).” The RDCs have
“dramatically improved store environments,” and allow for the shifting of payroll from
moving freight to concentrating on customers (Corral, 2010). Nineteen new RDCs
have been opened and now cover 100% of the retail stores (Wahlstrom, 2010). According to Ellison, the RDCs have “improved
lead times and they’ve improved our overall turns (Corral, 2010).”
The merchandising transformation
initiative focuses on “providing great value and reestablishing product
authority (Corral, 2010).” This allows
individual stores to more closely monitor their own product inventories. There is also an automated clearance cycle
which reduces the amount of products that are marked down. In turn, this aids Home Depot’s profit margin
(Corral, 2010).
Good customer service is vital for The
Home Depot to maintain its competitive advantage. Therefore, The Home Depot is concentrating on
associates who interact with customers, as well as customers themselves. Associates receive a generous benefits
package, and good performance is always rewarded. Home Depot also provides leadership to allow
associates to continue developing their knowledge (Corral, 2010). Knowledgeable employees are better able to
meet consumer needs. This leads to
autonomous actions on the part of the associate which is important for
combating new technology and adverse situations (Hill & Jones, 2008). For customers’ benefits, Home Depot has
simplified its product return process.
It has also begun providing guaranteed price matching, as well as other
bonuses (Corral, 2010).
Home Depot is working to attract new
customers through technological advances such as, its online website, iPhone
and Android apps, self-checkout with SAP platform, and YouTube videos. The online website provides a much larger
assortment of products for consumers than in stores (Smith, 2006). The self-checkout technology allows more
employees to be on the store floor assisting customers, and saves Home Depot $1
billion a year (Dignan, 2005). The
smart-phone applications allow customers to search and shop from their phones,
locate stores, and learn individual stores layouts. YouTube is a great way to achieve
media-promotion and the free-help videos and how-to advice builds The Home
Depot brand. Hundreds of their videos
are viewed in over thirty countries (Zmuda, 2011).
Additional actions that Home Depot has
taken to attract new customers include:
new products, “new-everyday savings,” credit card program, and targeted
circular advertising (Wahlstom, 2010).
New products include the Martha Stewart Collection, soft flooring, and
theater systems. The “new-everyday
savings” provides discounts for customers who use their Home Depot credit
card. The targeted circular advertising
focuses on specific market segments, such as the do-it-yourself customers
(Wahlstrom, 2010).
Financial Analysis
An analysis of trends, a competitor, and
the industry reveals that Home Depot, Inc. is in a good financial position. An examination of trends of Home
Depot’s ratios for the years of 2007 through 2011 revealed several points.
Please refer to Table 1 as a reference.
In 2007 Home Depot’s inventory turnover had been 4.09. The turnover rate increased throughout 2008
and 2009 spiking up to 4.43 and declining again through and 2011 and is now
down to 4.21. The inventory turnover
rate has not reached 2007 levels yet.
However, with the continuous recovering of the economy, HD may be able
to regain pre-crisis levels. In 2007,
Home Depot’s debt ratio was at .52, yet in 2008 it spiked to .60. It may be that HD took on more debt to
continue operations through the recession.
HD’s debt ratio began to decrease in 2009, yet it has not regained pre-
economic crisis levels. In 2007, Home
Depot’s return on assets was .11 and began to decrease through 2008 and
2009. However, the return on assets has
begun to increase again for 2010 and 2011.
HD’s current ratio for 2007 was 1.39 and dropped down to 1.15 in
2008. Since 2009, HD’s current ratio has
steadily increased, yet it has not achieved 2007 levels. The economic crisis had a significant influence
on Home Depot’s liquidity, but Home Depot is regaining the liquidity necessary
to meet its debt obligations.
An
analysis of Home Depot, Inc. in comparison to Lowe’s Companies Inc., a home
improvement retailing competitor, revealed interesting ratio differences
between the two companies. Please refer
to Table 1: Home Depot’s Ratios and Table 2: Lowe’s Ratios for specific ratios
(on page?). Compared to Lowe’s, Home
Depot has had a higher total asset turnover from 2007 to 2011. Therefore, Home Depot may be utilizing its
assets more efficiently than Lowe’s.
Home Depot’s inventory turnover rate was higher than that of Lowe’s for
2011 and 2010. This may indicate that
Home Depot’s inventory is more liquid than that of Lowe’s, or Home Depot may
have stronger inventory management.
Also, Home Depot’s return on assets has been two percent higher than
that of Lowe’s in 2011 and 2010. This
may reflect that Home Depot has a management team that is more effective at
creating profits with its available assets.
A
comparison of growth rates and price ratios reveals that Home Depot is
currently in a stronger position than Lowe’s.
In an evaluation of sales this quarter versus the previous year’s
quarter, Home Depot has a 3.8% sales growth rate while Lowe’s only has
3.1%. Also, Home Depot’s net income for
the year to date versus the previous year to date was 121.9 in contrast to
Lowe’s -34. However, Lowe’s 5-year
annual dividends were 30.73 while Home Depot’s were only 18.76. It may be that Home Depot is claiming more in
retained earnings than Lowe’s. Additionally,
Lowe’s P/E ratio is 18.9 in contrast to Home Depot’s 18.7. Yet, .2 may or may not reflect a significant
difference in price/earnings. Home
Depot’s current price/book value is 3.23 while Lowe’s is 2.0. This leaves Home Depot 1.23 points higher
than its competitor. Home Depot’s
current price/sales ratio is 0.90 while Lowe’s is 0.72. This is a reflection of Home Depot having a
higher stock price than Lowe’s. Home
Depot’s price/cash flow ratio is 12.30 compared to Lowe’s 9.80. Since Home Depot has a significantly higher
price/cash flow ratio, it must have more cash on hand to utilize than Lowe’s. This is apparent since the statement of cash
flows adds back in the costs of depreciation which are really just a “paper
cost” without cash outlay.
An
assessment of Home Depot’s relation to the home improvement retail industry,
Home Depot seems to be doing well. Home
Depot’s gross profit margin of 34.3 is above the industry’s 33.7. Home Depot also has higher pre-tax and net
profit margins than the industry. Home
Depot’s sales for this quarter versus the previous year’s quarter are .30
higher than the industry, and HD’s net income for the year to date versus the
previous year is 121.90 compared to the industry’s 62.40. Home Depot net income rate is substantially
greater than the industry average. This
may reflect that Home Depot’s management has been more efficient at controlling
costs than other companies in the industry.
Yet, Home Depot’s dividend rate is 18.76, while the industry’s is 22.31. Home Depot may be claiming more retained
earnings than other companies. Finally,
Home Depot’s price/sales ratio, price/book value ratio, and price/sales ratio
are slightly above those of the industry.
Home
Depot, Inc.’s financial position appears to be well and stable. Home Depot was in a strong position in 2007
which it lost during the economic crisis of 2008. Yet, Home Depot has been steadily making
gains since then to control its inventory, costs, and debt. Home Depot seems to be managing operations
more efficiently than its competitor, Lowe’s.
Home Depot’s market price, book share value, return on assets, and total
asset turnover are higher than Lowe’s.
Home Depot has been riding alongside the industry, as well as surpassing
it in areas like sales and net income.
Home Depot, Inc. is operating at a satisfactory level.
|
Table 1: Home
Depot Ratios
|
|||||
|
Period Ending:
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
Current
|
1.33
|
1.34
|
1.19
|
1.15
|
1.39
|
|
Acid
|
.28
|
.36
|
.24
|
.23
|
.40
|
|
Inventory
Turnover
|
4.21
|
4.29
|
4.43
|
4.38
|
4.09
|
|
Net
Receivable Collection Period
|
5.74 days
|
5.24 days
|
4.91 days
|
5.86 days
|
14.68 days
|
|
Total
Asset Turnover
|
1.69
|
1.62
|
1.73
|
1.75
|
1.51
|
|
Debt
|
.53
|
.53
|
.57
|
.60
|
.52
|
|
Gross
Profit Margin
|
.34
|
.34
|
.34
|
.34
|
.34
|
|
ROA
|
.08
|
.07
|
.05
|
.10
|
.11
|
|
Table 2: Lowes
Ratios
|
|||||
|
Period Ending:
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
Current
|
1.4
|
1.32
|
1.21
|
1.12
|
1.27
|
|
Acid
|
.23
|
.20
|
.13
|
.14
|
.18
|
|
Inventory
Turnover
|
3.80
|
3.73
|
5.88
|
4.15
|
4.30
|
|
Net
Receivable Collection Period
|
1.42 days
|
1.59 days
|
.78 days
|
2.22 days
|
1.63 days
|
|
Total
Asset Turnover
|
1.45
|
1.43
|
1.48
|
1.56
|
1.69
|
|
Debt
|
.46
|
.42
|
.45
|
.48
|
.43
|
|
Gross
Profit Margin
|
.35
|
.35
|
.34
|
.35
|
.35
|
|
ROA
|
.06
|
.05
|
.07
|
.09
|
.11
|
Recommendations
The Home Depot, Inc. needs to intensify
its international concentration to achieve greater economies of scale. It should also consider creating customized
products to meet local needs in other countries, such as China and Canada. The current marketplace is focusing more on
green/renewable energies. Therefore, The
Home Depot, Inc. should expand its product lines with more renewable energy
products. Home Depot has always been a
leader in the industry. In order to
maintain this status, it needs to broaden its market segment. One way to do this would be to extend its
marketing to female consumers.
The Home Depot, Inc. should continue
emphasizing customer service. They
should have stipulations that all customers are to be greeted and
assisted. If associates are consistent
with this they will be rewarded and this will work as a psychological positive
reinforcement of their behaviors.
Associates also need to be extensively trained on information about all
products and be able to assist customers with information on do-it-yourself
projects.
Works Cited and
Consulted
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http://itunes.apple.com/us/app/the-home-depot/id342527639?mt=8.
Corral, Cecile B..
(2010). Home Depot on Path to Recovery
with Three-Pronged Initiative. Home Textiles Today.
Retrieved from Ebscohost on Novemeber 25, 2011.
Dignan, Larry.
"Home Depot Self-Checkout Boosts Sales, Satisfaction - Projects Management
- News & Reviews - Baseline.com." Information Technology Planning,
Implementation and IT Solutions for Business - News & Reviews -
Baseline.com. Web. 28 Nov. 2011.
<http://www.baselinemag.com/c/a/Projects-Management/Home-Depot-SelfCheckout-Boosts-Sales-Satisfaction/>.
Hill, Charles W.L.,
Jones, Gareth R. (2008). Strategic management: an integrated approach.
Mason, OH: South-Western Cengage Learning.
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2011.
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Joint
Center for Housing Studies of Harvard University. (2011). A New Decade of
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from
MsnMoney.
"Home Depot on a Roll- MSN Money." Money: Personal Finance,
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<http://money.msn.com/top-stocks/post.aspx?post=77ab436a-0c69-454c-852e-f64b13d3d23b>.
"Our
New Android App Is Here: More Saving, More Doing – All from Your Android
Smartphone - The Apron Blog by Home Depot – Tips, Ideas, Products and
Inspiration for Your DIY Projects and Home Improvement." Home
Improvement Made Easy with New Lower Prices | Improve & Repair with The
Home Depot. Web. 24 Nov. 2011.
<http://ext.homedepot.com/community/blog/new-android-app-is-here-more-saving-more-doing-all-from-your-android-smartphone/>.
The
Home Depot Annual Report 2010. (2011). Retrieved from
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Peter. (2010). Home Depot: Shifting from
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