Strategic Audit of The Home Depot
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This investigation looks at the company Home Depot and provides a SWOT Analysis and PESTEL analysis of the company as it stands. Also included is an analysis of the company’s values, strategy and objectives, and ethical culture. In conclusion a recommendation is provided to further the company’s strategic objectives.
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Strategic Audit of The Home Depot
- 1. Home Depot A Strategic Investigation Akhtiara Erskine October 10, 2014
- 2. THE HOME DEPOT Headquarters: Atlanta, Georgia Incorporated 1978: Delaware IPO: 1981 “HD” Stores: 2,263 in USA, Mexico & Canada Employees: 300,000+ Annual Sales: $78 Billion 20% Market Share Corporate Governance: 2 Insiders, 8 Outsiders Akhtiara Erskine 10/10/2014
- 3. Orange-Blooded Mission: to provide the highest level of service, the broadest selection of products and the most competitive prices The Home Depot’s Core Values: Akhtiara Erskine 10/10/2014
- 4. Strategies and Objectives Strengthen performance Gain market share Seamless customer experience Customer Service Product Authority Disciplined Capital Allocation Interconnected Retail Akhtiara Erskine 10/10/2014
- 5. SWOT Analysis: Strengths Brand Name Awareness Strategic Product Alliances Shareholder Minded Excellent Performance Akhtiara Erskine 10/10/2014
- 6. SWOT Analysis: Weaknesses Customer Service Attracting Quality Associates Privacy and Security Reliant on Third Party Suppliers Akhtiara Erskine 10/10/2014
- 7. SWOT Analysis: Opportunities Further Expansion in Mexico, Canada and US Become Best Places to Work New CEO, New Strategy? Increased Demand for Interconnected Retail Recession Recovery Increasing Home Maintenance Needs Akhtiara Erskine 10/10/2014
- 8. SWOT Analysis: Threats Rivalry from Competitors: Lowes, Friedman’s (locally) Relative Power of Government: Laws and Regulations Legal Proceedings Weather Conditions Akhtiara Erskine 10/10/2014
- 9. Pestel Analysis Political Hom e Depo t Social Technolo gy Legal Econonom ic Environme nt Akhtiara Erskine 10/10/2014
- 10. Financial Analysis Akhtiara Erskine 10/10/2014
- 11. Home Depot: Recommendation Continue current strategy Become best places to work Thank You! Akhtiara Erskine 10/10/2014
Notes de l'éditeur
- I chose HD for this project not because I love the company but just the opposite. I’ve had so many negative experiences over the years with Home Depot and last year, over a short period of time, I had five or more negative experiences. I was so annoyed by their terrible customer service and incorrect in-stock listings on their website that I chose to boycott the company and instead went to Friedman’s or Lowe’s every time I needed something home improvement related. Recently, we moved and undertook a remodeling process. As part of that we unfortunately had to go to Home Depot. My boyfriend had to drag me inside the doors but what I found surprised me: I was actually met with excellent customer service! We were greeted by five employees and asked if we needed help repeatedly during the time we were there. In the past we had to hunt down employees and when we found them they could never help us. This time everyone was very helpful and was able to give us answers to our questions and direct us to where we needed to go. I was so surprised by this visit that I wondered if something had shifted in their company strategy and policies. Later that week, I received this assignment and it seemed like the perfect opportunity to investigate!
- So let’s talk a little bit about The Home Depot. They’re in the home improvement business and have 2,263 stores. They sell a wide assortment of building materials, home improvement products, lawn and garden products and provide a number of services. They have stores throughout the US, including Puerto Rico, the U.S. Virgin Islands and Guam. They also have stores in Canada and Mexico. They began in 1978, are incorporated in Delaware and have headquarters in Atlanta, Georgia. They went public in 1981 with the ticker “HD” Domestically Home Depot captures nearly 20% of share of the home improvement market Internationally, the company arrived in Canada with the acquisition of Aikenhead’s home improvement centers in 1994, and in Mexico in 2001 through the acquisition of Total HOME. In 2006 they opened business in China but closed operations in 2012. In January 2014, they acquired Blinds.com to gain market share in the DIY online retail market. Board of Directors: As for their board of directors, Francis Blake is the current CEO and Chairman of the board. He has been in this position since 2007 and with Home Depot since 2002. Earlier this year Home Depot announced that Craig Menear would be taking over the position of CEO on November 1, 2014, however Blake will remain chairman of the board . As part of this announcement Menear was added to the board. He is currently the President of US Retail and has been with the company since 1997. He is also currently Chairman of the Home Depot Foundation’s Board of Directors. Two the board of directors, Blake and Menear, are insiders of the company and the other ten are outsiders. They consist of business professionals from a wide arena of industries and experience. There are two women and the rest are men. All of them are Caucasian except one.
- The Home Depot’s statement of purpose or mission statement is “to provide the highest level of service, the broadest selection of products and the most competitive prices”. They project themselves to be a values-driven company with eight core values: Excellent customer service, Taking care of our people, Giving back, Doing the "right" thing, Creating shareholder value, Respect for all people, Entrepreneurial spirit, and Building strong relationships. The business has been built on a culture obsessed with customer service, knowledge, and innovation, which is best-of-breed in the home improvement industry— They have worked hard to ensure that the appropriate staff is on hand to solve any problems its customers may have. This combined with the reliability of information that consumers can draw upon it is unlikely to be replicated easily (Lowe's is the only other company that comes close), and consumers would be unlikely to switch if a new competitor entered the market because of the long history of consistent service. As you can see, giving back to the community is one of the company’s values. One way they do so is via The Home Depot Foundation which is the arm of the organization they have created for charitable endeavors and giving back to the community. Their mission is “to ensure every veteran has a safe place to call home”. To that end they have committed $80 million over five years to support the housing needs of veterans. Additionally they provide free workshops to customers and their families to learn vital skills for creating the home of their dreams. They are also a corporate partner and sponsor of many sports teams in Atlanta, the Red Cross, and Good360 (an organization whose mission is fulfilling the needs of nonprofits with corporate product donations) The Home Depot also pledges a commitment to responsible sourcing of materials for their products, and expects that suppliers are likewise committed to responsible sourcing.
- In 2014, they have continued their “consistent strategic framework comprised of three key initiatives: Customer Service; Product Authority; and Disciplined Capital Allocation, Productivity and Efficiency. Those objectives tied with their Interconnected Retail initiative are their strategy to strengthen performance, gain market share and provide seamless customer experience. For Customer Service, they have focused on associates being able to devote 60% or more of store labor hours to customer-facing activities; this goal was met at the end of FY2013. They have also instituted new training programs for interconnected retail. They also attest to offering competitive wages and benefits to be able to attract talented associates. Towards the Product Authority goal, they have been building what they’ve coined “Merchandising Transformation”, designed to give merchants better tools for forecasting, replenishment, assortment and space allocation. These tools are being used to create additional value for customers, associates and shareholders. They also have three new direct fulfillment centers planned in 2014 with the last being built by the end of 2015. The intent here is for their facilities to be able to deliver 90% of customers parcel orders within two days in the US. Their Disciplined Capital Allocation, Productivity and Efficiency strategy aims to increase their dividend every year, targeting a payout ratio of 50 percent of net earnings; returning excess cash to shareholders through share buy backs. Additionally they focused on optimizing the supply chain network and improving inventory, transportation and distribution productivity. This effort included enhancements to forecasting and replenishment systems, helping to react to and recover from sales spikes while keeping inventory under control. The interconnected retail initiative is woven throughout Home Depot’s business and connects the other three key initiatives. At the core of this initiative is using stores as a network of convenient locations for customers who shop online. The next step in this process, adding to the existing buy online, pick up in store; is buy online, deliver from store, which is expected to further increase customer experience with lower shipping and transportation costs. Additionally, they continue to enhance the website and mobile sites by improving search functionality, making product content more visual and engaging, and simplifying the check-out process.
- As part of a SWOT analysis, I identified some of the Home Depot’s strengths First, Brand Name Awareness: The Home Depot is the largest home improvement retailer in the world, with over 300,000 employees and annual sales of nearly $80 billion. Each week, Home Depot stores are visited by over 22 million people. These customers are segmented into three categories, namely do-it-yourself customers, do-it-for-me customers and professional customers. They are a household name in the US and that name is spreading across North America. Another strength is their Strategic product alliances: The Home Depot is one of the fastest growing retailers in US history which has largely been achieved by their strategic alliances with other industry leaders allowing the company to provide exclusive products to their DIY and contractor customers such as Ryobi tools, RIDGID tools, BEHR paint, LG appliances, and Toro and Cub Cadet lawn equipment. They’re also Shareholder minded: In FY 2013, Home Depot repurchased a total of $8.5 billion or 111 million shares of outstanding stock to return value to Shareholders. Since 2002, they have repurchased approximately 1.1 billion shares, returning more than $46 billion to Shareholders. Also In early 2014 they increased their dividend by 21% to $1.88 per share. They’ve also had Excellent Performance: Despite the recession the Home Depot saw sales and revenue growth over the last five years. The company reported revenue of $78.8B for fiscal year ending February 2014 and $74.7B ending 2013, an increase of 5.4%. FY ending 2013 was an increase of 6.2% over FY ending 2012, and they also had an increase of 3.5% and 2.75% respectively in the two years prior. As you can see on the right side of the graphic, Operating profit margin also increased year over year for the last five years. As well as, Diluted earnings per share, average ticket price, comparable store sales, sales per square foot, and return on invested capital.
- Every strong company has weaknesses and here are some of Home Depot’s Customer Service & Attracting Quality Associates is an issue: many visitors to Home Depot have encountered employees who did not have a thorough understanding of store inventory or product utility. Customer service positions have historically had high turnover rates, which leads to increased training and retention costs as well as poor customer experience since they are constantly dealing with new associates who often do not have experience and product knowledge. These negative experiences when shared over social media, can have an impact on the brand and their reputation. Privacy and Security is another are for improvement: Information systems are vulnerable to an increasing threat of continually evolving cybersecurity risks and they must continuously be looking at ways to increase security. In 2014 Home Depot had a data breach which compromised as many as 56 million customer cards and damaged their reputation however, surprising, not as much as target’s smaller breach. Some market analysts attribute this to consumers fatigue regarding data breach stories. Another weakness they can’t really avoid is that they are Reliant on Third Party Suppliers: They must continuously identify and develop relationships with qualified suppliers who can satisfy their high standards for quality and need to access products in a timely and efficient manner. This challenge is adversely affected by political instability, financial instability of suppliers, suppliers’ noncompliance with laws, trade restrictions, tariffs, currency exchange rates, supply disruptions, weather conditions, natural disasters, shipping interruptions or costs, and other factors beyond their control.
- An opportunity for HD is Further Expansion in Mexico, Canada and US: Home Depot has had an aggressive expansion plan based on demographics. They seek areas with many DIY customers and areas of development where they can attract more contractor customers (currently 35% of their customer base is contractor sales and this expected to grow). By the close of 2014 they plan to have opened 8 new stores and developed additional supplier alliances via exclusive brands and acquisitions. (Become Best Places to Work): In an effort to combat their weakness of poor customer service and inability to attract and keep good talent, they could increase their pay, benefits and work/life balance structures to catapult them onto the best places to work list. This would give employees more incentive to perform higher and reduce turnover rates while attracting new talent. (New CEO, New Strategy?) Having a new CEO could be a big opportunity for HD. Speculation suggests that the strategy will not change under the new CEO but rather the current strategy will be continued however with an increased focus on productivity initiatives such as inventory and supply chain efficiencies, space optimization and order management. (Increased Demand for Interconnected Retail): More customers are turning to the internet to place orders, while still looking for the best possible prices and highest level of convenience. Home Depot recognizes this and is keeping up with their options for order online, ship to store, order online, pick up at store and the new order online, and deliver from store. These initiatives better enable the consumer on the go to become and remain a Home Depot customer. (Recession Recovery): Home prices across the country are slowly appreciating since the great recession leading consumers to invest in projects in their homes. This is leading to an increase in sales per customer and an increase in the ticket average on sales at HD. (Increasing Home Maintenance Needs): Additionally, Across the country homes continue to age and this is increasing the amount of maintenance the average home owner needs to put into their home in the form of remodeling and maintaining the home. Combined with the increase in home prices, home owners have more incentive to perform maintenance on their home to increase the value of the home for sale.
- A standard threat that HD faces is Rivalry from Competitors: They operate in an area that is largely competitive not just from other national companies like Lowes, but also local home improvement stores like Friedman’s. Also many of their products are in competition with hardware stores, electrical and plumbing and lumber yards. Increased competition on the internet is also a threat. Market share, customer relationships and financial performance could be affected by a slow or insufficiently planned response to competitors. Relative Power of Government: Changes in, or adoption of new federal, state or local laws and regulations governing minimum wage or living wage requirements, the sale of some products, supply chain transparency, taxes, energy costs or environmental matters could increase costs of doing business or impact store operations. Legal Proceedings: Home Depot is involved in a number of legal proceedings. The outcome of some of these proceedings and other contingencies could require them to take actions which could adversely affect operations or could result in excessive verdicts. Weather: A year of bad weather, snow storms and rain can have detrimental effects on the home improvement market as homeowners are less likely to plan and complete projects.
- PESTLE Analysis: Looking at a pestel analysis let’s turn first to: Political: Government policies often affect the housing market. Home Depot is affected by state and local regulations. They must remain compliant in all geographic regions where they operate. Economic: While the recession saw consumers spending less money it also saw them doing more DIY projects instead of paying for it to be done for them. The trend has continued as we recover from the recession and Home Depot continues to see increased sales to DIY customers. Contractors are becoming an increasing portion of their business signifying that as the economy improves people are once again paying for “do it for me jobs”. In fact, according to Morningstar Analysts, in weak economic times, consumers remain in their homes, embarking on more improvement projects, boosting DIY revenue. Alternatively, when home prices rise, the wealth effect generates a psychological boost to home sales, reinvigorating professional sales. Therefore regardless of the economic condition, Home Depot should, and has, seen increased growth. Social: There is a national trend towards DIY projects, remodeling and flipping homes, this is increased by shows popping up about “flipping” homes and remodeling old homes to live in. This social trend increases business to Home Depot’s industry in the form of DIY customers investing in their homes or buying houses to flip cost effectively. From a Technological standpoint: Advances in technology have a large effect on Home Depot’s business. They are focused on staying up to date with technology by increasing efficiencies in their Supply Chain using technological resources and increasing their websites usability and the convenience of ordering online through their Interconnected Retail initiative. (Environmental): The green movement across the USA and the world affects all business and the home improvement industry is no different. Home Depot has addressed environmental concerns by creating principals QUOTE “to guide us in our actions and lead us down a path of sustainability”. These include training employees to understand environmental issues, conserving natural resources and encouraging costumers to be environmentally conscious shoppers. Home Depot was honored with a SmartWay® Excellence Award from the U.S. Environmental Protection Agency for the second consecutive year as an industry leader in freight supply chain environmental performance and energy efficiency. In 2013 they also accomplished an absolute energy use reduction of 289 Trillion kW/h. They were also named one of the top 25 socially responsible dividend stocks and have many other awards and certificates surrounding sustainability. Legal: legal proceedings can have a negative effect on any company’s reputation and can tie up many resources in legal battles. In November 2013, the Company received subpoenas from the District Attorney of Alameda County, seeking documents and information relating to the Company's disposal of hazardous waste at its California facilities. For a company that claims to be environmentally friendly, this is an alarming accusation. In early September, 2014 Home Depot was also sued over the data breach by a customer, saying the company failed to properly safeguard customer data from hackers
- The Home Depot, Inc. is the world's largest home improvement specialty retailer with fiscal year 2013 retail sales of $78.8 billion and earnings of $5.4 billion. After an analysis of their financials over the last 5 years, it is clear that the recession and recovery from the recession have been good for Home Depot. As you can see on the graph, all of the key profitability ratios show promising increases and steady growth over the last five years. Increasing profitability ratios indicate the company’s sturdy performance and its ability to deliver the returns expected by its shareholders. CHANGE SLIDE 2X In comparison with their largest competitor, Lowe’s, they have shown outstanding performance over the last five years, with even larger gains on market share and revenue in the last three years. Although gross margins have been relatively similar, Home Depot’s Net Profit Margin has exceeded that of Lowe’s by at least 2% the last three consecutive years. A similar picture can be seen in operating margin with Home Depot beating Lowe’s by 2-3 percent every year for the last three years and by 1% in the two years prior. Home Depot’s Current Ratio is much larger than its Quick Ratio showing that the company’s assets are very reliant on inventory; this is of course expected in any retail operation and is standard for the industry. However it is noteworthy that their competitor Lowe’s has a much lower quick ratio of only .06 in 2014 which has been decreasing steadily over the last five years. Lowe’s current ratio is also in a steady decline coming in at 1.16 in 2014. CHANGE SLIDE 2X However in a comparison of leverage ratios, Lowe’s beats Home Depot on debt to equity meaning creditors have more stake than investors in Home Depot, whereas at Lowe’s the investors have more stake than creditors. For both companies their debts to equity ratios have been slowly but steadily increasing over the last five years. Of note for Home Depot there was a large increase in their debt to equity ratio FY ending 2013 due to issuing 5.25 Billion in Senior notes to pay off previous senior notes, general corporate expenses and repurchase of company stock.
- I recommend that Home Depot continue their current strategy and invest in employees to become known as a best places to work company and provide incentives for customer service which will attract better talent and help to strengthen one of their most damaging weaknesses.