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Dow 30 Profile: The Home Depot
The Home Depot, Inc. (HD – Free Home Depot Stock Report) traces its roots back more than 30 years. In 1978, two men with backgrounds in the hardware business, Bernie Marcus and Arthur Blank, set out to open a new breed of building supply stores. At the time, the retail building supply industry had few large players, and was mainly a collection of local hardware and specialty stores. For instance, if someone were renovating a kitchen, he/she may have had to get wood from a lumber yard, granite from a quarry or masonry supply store, a refrigerator from an appliance shop, and lighting from an electrical retailer. Marcus and Blank wanted to change that by creating a store that offered one-stop shopping for do-it-yourself (DIY) enthusiasts and home owners.
Their vision came to life the next year when the men teamed up with Ken Langone, an investment banker, and Pat Farrah, a “merchandising guru” to open the first two Home Depot stores on June 22, 1979 in Atlanta, Georgia. At about 60,000 square feet each, the warehouse-like stores were different than any other home-improvement shop around, dwarfing other such retailers in both size and scope. Indeed, The Home Depot stores stocked about 25,000 SKUs (stock keeping units) a piece, which was much more than the average hardware store did at the time.
Most companies aim to be a leader in one area (i.e. price, selection, customer service, innovation, etc.), but Marcus and Blank wanted to take the lead in multiple categories. As is often the case with “big-box” retailers, a wide selection of merchandise and competitive prices come at the expense of customer service. Marcus and Blank, however, were unwilling to compromise in this area. In fact, they made it a cornerstone of their business. Sales associates were given extensive training to boost their product knowledge and help them walk shoppers through various home-improvement projects. The company went as far as to offer clinics for customers to increase their knowledge base and make them feel more confident taking on DIY projects.
The company grew quickly and went public in 1981 when it listed its shares on the NASDAQ. The stock moved to the New York Stock Exchange in 1984 and is now one of the 30 blue chip components of the Dow Jones Industrial Average. In fiscal 1986 (fiscal years end in January of the following calendar year), The Home Depot cracked $1 billion in annual sales and finished the year with 60 stores. In 1989, the company celebrated the opening of its 100th location. Sales grew exponentially through the 1980s and 1990s, as the company added new, bigger stores at a brisk pace. Early in the 1990s, the company opened its first EXPO Design Center, a design showroom that focused on higher-end items (lighting, flooring, design services for kitchen and bathroom remodeling, etc.), rather than Home Depot’s normal array of tools, lumber, etc. In 1994, The Home Depot made its first foray into international markets with the acquisition of Aikenhead’s, a chain of home-improvement centers in Canada, which were rebranded under the Home Depot banner. In fiscal 1999, as the millennium came to a close, The Home Depot had over 900 stores and more than $38 billion in sales.
A turn of the calendar didn’t cause the company to take its foot off the accelerator, especially as the heady days of the housing boom were starting to take shape. In 2001, it entered the Mexican market. Early 2006, the same year the company opened its first store in China, the housing market peaked. That year, The Home Depot earned a record $2.79 a share on sales of nearly $91 billion (also a record for the retailer). In 2007, the housing bubble began to deflate, and sales and earnings slipped. That same year, the company made the decision to sell HD Supply, its wholesale distribution division, to a consortium of three private equity firms (Bain Capital Partners, The Carlyle Group, and Clayton, Dubilier & Rice) in order to focus on the core retail operation. Two years later, in 2009, the company shut down its EXPO Design business, which had never performed up to expectations, even during the housing boom.
Today, The Home Depot is the world’s largest home improvement specialty retailer, and has roughly 2,250 stores and a presence in all 50 states, the District of Columbia, various U.S. territories, Canada, Mexico, and China. The average store size is now around 105,000 square feet of indoor space, with an additional 24,000 square feet of outdoor garden space, and stores typically stock between 30,000 and 40,000 products over the course of a year.
As a result of the various sales and closures noted above, the company is focused solely on its retail business (in stores and online), and has no other operating segments. Marcus and Blank’s philosophy of offering a wide selection of products, competitive prices, and quality customer service still holds true today, and garners management’s constant attention. Store expansion has slowed in recent years, due to factors such as market saturation and softness in the housing market. Rather, the company has looked to improve the productivity of its existing locations through customer service, inventory management, and supply-chain improvements.
Besides do-it-yourself customers, The Home Depot caters to two other customer groups: do-it-for-me (DIFM) and professionals. DIFM customers typically purchase products themselves, but outsource installation or project completion to a third party. Many of these shoppers choose The Home Depot’s own installation services for things such as carpet, flooring, cabinets, and countertops. Professionals are usually contractors, repairmen, or trades people who shop often and take advantage of services like delivery and expanded credit programs.
Although The Home Depot has established itself as the dominant player in the retail building supply industry, it faces stiff competition. Local hardware stores are still around, as are specialty home-improvement stores, such as those that focus on plumbing, electrical, paint (like Sherwin-Williams (SHW)), and masonry supplies. Specialty design stores and even some discount retailers compete for consumer dollars for appliances and kitchen and bathroom remodeling projects. Of course, the company’s largest and most conspicuous adversary is Lowe’s (LOW). Although smaller (Lowe’s is the world’s second largest home improvement retailer), Lowe’s has a similar business model to The Home Depot, and its warehouse stores compete with its larger rival in a Hatfield/McCoy manner.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.