In Focus

Can Home Depot Rebuild?

Putting Home Depot through the Chicks' Dozen
by Chick Megan

NOTE: All this month in the Chicks' Eye View we will be featuring the richest of the rich from the Forbes List of the World's Richest People. Just who are they and how'd they get to be so filthy rich?

This month's look at some of the wealthiest people in America included none other than the co-founder of Home Depot (NYSE: HD), Arthur Blank. Back in February, Chick Cheryl did an article Unscrambling Home Depot. Then recently, I reported on Lowes, Home Depot's worst nightmare. The fact of the matter is, folks, that Lowe's is giving Home Depot a run for their money. And it is perhaps the main reason that Home Depot is beginning to focus on their downsides and seemingly want to turn things around. So in fact, HD's Nemesis is also a blessing in disguise. Let's take a look at Arthur Blank's early start and how he has been credited with being one of the most innovative businessmen to date. Did the philosophies that helped turn his company into a billion dollar success story get lost in the aisles among the forklifts and falling sandbags? And is it too late for Home Depot to rebuild?

A native New Yorker, Arthur Blank found his way to the quaint town of Wellesley, Massachusetts and pursued a degree in Accounting from Babson college. He began his professional career as an Accountant at his fathers pharmaceutical company, which was eventually bought out by Daylin Drugstores. Handy Dan Improvement Centers, a division of Daylin, employed Blank and his buddy Bernard Marcus until a corporate raider came along and saw to it that they were fired. Another blessing in disguise indeed, as it motivated the young men to begin their own home improvement store, complete with all the things they felt were lacking at their former place of business: Enormous inventories, warehouse sized stores, prices as much as 40% lower than their competitors, and skilled professionals at-your-service.

In 1979 in Atlanta, the first three Home Depot's were opened. With a staff of over 200 and 7 million in sales, they continued on and became profitable by 1980, and went public by 1981. In 1988 HD employed over 157,000 associates and boasted a whopping $30.2 billion in sales. They are still considered the number one home improvement store today.

Enter Lowe's. See, what I think happened is that Home Depot got a little too big for their britches. They were untouchable and unstoppable, or so they thought. The problem was that with their fast growth and immense success, they began to forget about the basic premise by which they became such an entity. And Lowe's capitalized on the very idea that personified Home Depot. Now, Lowe's has become a huge thorn in their side.

Fortunately for HD, they didn't wait until the rain came to put a roof over their heads. According to a Reuter's report released on July 30, 2001, Home Depot is now implementing a new strategy designed to improve their customer service and reduce the amount of clutter in their stores. Entitled the "Service Performance Improvement," the plan includes the removal of all forklifts during busy shopping times and hiring late night crews to aid in receiving and stocking. Basically, this is a return to Arthur Blank and Bernard Marcus' original philosophy -- being a "Company with a Conscience."

So, how will Home Depot stand up to the Chicks' Dozen?

1. Buy What You Know  It's Home Depot, people... hellllooooo!

2. Keep It Simple Sister Sledge-Hammer  Do we understand this company... can we explain it to a fourth grader? Absolutely!

3. Industry  Will this industry continue to thrive? Most definitely. If not from the patronage of Chick Karin alone, then what???

4. Leader In Its Field  Head Honcho... Big Cheese... Top Dog... Yep, that's them.

5. Repeat Profitability  If they build it, we will come...

6. Gross Margin

12,200 (Revenues) - 8,545 (Cost of Goods Sold) = 3655

3655 / 12,200 (Revenues) = 30%

Of course, we like to see 50% or better.
 

7. Net Margin

632 (Net Income) / 12,200 (Revenues) = 5%

Doesn't make the cut for our 8% requirement.

8. Cash vs. Long Term Debt

1373 (Cash) / 1268 (Long Term Debt) =

1.08x more cash than debt.

Hubba Hubba... we like that!

9. Flow Ratio

9854 (current assets) - 1373 (cash) / 6686 (current liabilities) - 0 (short term debt) =

8481 / 6686 = 1.25

Chicks like a flow ratio under 1.25... this one meets inspection, too.

10. Increasing Growth

12,200 (Revenues 04/29/01) - 11,112 (Revenues 04/30/00) =

1088 / 11,112 = .09 %

Well, it's better than nothing!

11. Strong Management and Operating History  Arthur Blank was actually the reason I happened upon putting this company through the dozen again. You've had a taste of Mr. Blank's beginnings and have seen the results... major success. In fact, Crown Publishing released a book by and about Arthur Blank and his partner Bernard Marcus back in 1999, "Built From Scratch," if you should feel the need to read. If you should feel the need to purchase wood that was cut from environmentally sensitive areas, however, you'll have to look elsewhere. Arthur Blank received a very prestigious award for refusing to sell such product back in 1999.

12. Buy on Sale
52-Week High = $60.00
52-Week Low = $34.69
Current $ = $49.13

Chick Cheryl's article was available this past February, so we really only have a little time to compare numbers from then and now. Gross Margins were the same; Net Margins were about the same, too. Cash to long term debt improved modestly and the flow ratio did as well. Growth is actually moving in the right direction again, where back in February it wasn't. Based on HD's intentions for the future, I think we can count on seeing a lot of good come out of their sudden concern for Lowe's competition. Mr. Arthur Blank retired in May of this year, but not before recognizing the need to return to their original strategy. Will Home Depot survive? I think so. With such a sturdy foundation and all the necessary tools, Home Depot will probably outlast them all.