The Home Depot’s executive management team told analysts and investors Wednesday morning that the giant home improvement retailer’s long-range goal is to consistently deliver operating margins of 10% and return on investment capital of 15%.
To achieve its “10-15” plan, the company is implementing dynamic changes to its operations and business structure that, they say, exploit the “power” of its size and market penetration. Those changes are aimed at reversing what company officers acknowledge have been “competitive disadvantages” in such areas as customer service, supply-chain management, information technology, and store productivity.
Those disadvantages, coupled with the severe housing recession, continue to hamper the Atlanta-based Depot’s financial performance. But based on stronger spring sales, the company offered sunnier projections about its profitability for 2009, which its officers predict will be off by 7%, or by 20% to 26% on an adjusted basis.
(Previously the company was anticipating its adjusted earnings per share to be off by 26%. The retailer still expects revenue this year to be down 9% and its comparable-store sales to be off “in the high single digits.”)
To boost sales and profit, Depot wants all of its moving parts “reading from the same script,” says Chairman and CEO Frank Blake. That’s meant the stores are relinquishing some of their operational freedom in favor of tighter integration with other parts of the company, so that Depot can better hit its long-range target of raising sales per square foot to between $340 and $350, from their current level of $270. Depot also wants to reduce operating expenses to around 25% of annual revenue.
To get shoppers spending more per visit, Depot’s stores are placing renewed emphasis on project selling, “which is part of our heritage,” said Craig Menear, the company’s executive vice president of merchandising.
As part of that effort, salespeople are getting better training to answer questions and connect the product dots for customers, explained Marvin Ellison, the chain’s executive vice president of U.S. Stores. He told analysts that Depot has added between 300 and 400 man-hours per week to its stores, to ensure they have enough bodies on the sales floor at the right times. Depot has also rolled out a new training program for associates in its installed sales program, which last year was “embedded” into the merchandising and store operations departments.
Now that Depot has exited its Expo Design Center business and closed other ancillary specialty outlets, it can now focus on nurturing one retail format. To make its big-box stores more productive, the company is simplifying their operations, with less red tape and corporate protocol. It is also in various stages of applying software tools that measure performance, forecast product needs, and impose greater discipline on the company’s operations. Menear asserted that these tools will “allow for the consistent delivery of U.S. gross margins.”
Matt Carey, Depot’s chief information officer, admitted to analysts and investors that the company’s systems have not always been world-class. Until very recently, for example, Depot was neither able to handle domestic and imported merchandise in the same distribution center nor price its clearance inventory by store. But Carey and Depot’s Senior Vice President of Supply Chain Mark Holifield have been working together to improve those systems and processes, as Depot shifts inventory management from its stores and towards its expanding distribution network.
Depot’s Canadian division is currently testing a new Enterprise Resource Planning (ERP) system, dubbed SAP (for Systems, Applications, and Products in Data Processing), to analyze and fine-tune each of its stores’ merchandise floor plans, with an eye towards increasing turns and improving inventory management. Depot is assessing the results from this system to determine if it should be rolled out to its stores in the U.S. next year.
Last year, Depot reduced its U.S. stores' inventory by $1 billion. It also reduced by half a problematic out-of-stock situation. The company’s goal is to cut those stores’ inventories by another $1.2 billion. And the facilitator of this effort is the retailer’s Rapid Delivery Centers, or RDCs. The company opened six of these huge warehouses (between 450,000 and 657,000 square feet) that consolidate and redistribute merchandise to its stores instead of having the stores receive inventory themselves. More than 280 suppliers now send products through the RDCs. Depot plans to open five or six more centers this year and have 20 opened by the end of 2010, which would support 100% of its U.S. stores. “My leaders in the field are saying ‘give us RDCs’ because they see the benefits,” said Ellison.
RDCs cost between $3 million and $4 million to build and open, or $10 million if they’re mechanized like the center in Valdosta, Ga., that Depot has been testing with positive results. Depot has also been consolidating the operations and management of its lumber/bulk and stocking warehouses. The company believes that by running more of its inventory through its distribution channel, it can achieve transportation savings that alone would fatten annual gross margins by between 0.4% and 0.8%.
As its distribution network widens, its retail operations are in a slow-growth mode.
Home Depot plans to open only 13 stores this year, of which three will be in Canada and five in Mexico. For the foreseeable future, it plans to increase its total square footage by no more than 1.5% annually. And it won’t be adding to the dozen stores it operates in China until it figures out how to make money there, said Blake.
Home Depot’s capital expenditure budget this year, at around $1 billion, is significantly below what it spent in 2008. Carol Tome, Depot’s CFO, forecasts that, on average, the company would spend between $1.2 billion and $1.5 billion annually through 2013. Yet company officials remain confident that the direction their company has taken will allow its stores, which currently capture about 20% of all retail home-improvement purchases, to pick up business from competitors, especially if the market meets its projected growth rate of 5% to 7% per year.
“There’s still plenty of room for growth,” said Tome.
John Caulfield is senior editor for BUILDER magazine.
Learn more about markets featured in this article: Atlanta, GA.