The Home Depot 2013 Year in Review and 2014 Guidance

Home Depot hosted a 2013 investor conference call which had a wealth of information about managements review of the year and forecasting for 2014.  Here some highlights for The Home Depot’s 2014 forecast:

  • Sales growth of approximately 5%
  • 8 new stores most of which will be in Mexico.
  • Operating margin expansion of approximately 70 basis points
  • Share repurchases of approximately $5.0 billion
  • Diluted EPS growth after share repurchases of approximately 17%
  • Capital spending of approximately $1.5 billion.

The numbers above and managements discussion of the numbers and the business strategy make clear they feel their opportunity is in maximizing sales and productivity of their existing footprint and not in expanding the footprint.   Frank Blake commented “New store growth no longer plays a dominant or even significant role in sales growth or capital allocation.  U.S. and Canadian markets are effectively saturated.”  I wonder how the folks over at Lowe’s feel about that observation since their footprint is significantly smaller than The Home Depot.  Mr. Blake continued, “Since our June 2012 conference we exited our big box stores in China and we have no intent to build stores in other areas of the world and here is the main reason why.  In the second quarter of 2013 the three-months of May, June and July we grew comps in our U.S. business by $2 billion in three months.  A wildly successful venture into a foreign county might yield $2 billion in sales after a decade of effort.  So opportunity and capital efficient strongly argue for intense focus here.”

 

Other interesting stats from the conference call:

  • 15 million visits per week to homedepot.com
  • Marvin Ellison commented stores stock about 35,000 SKU’s.
  • Pro is 3% of THD customers, but 35% of sales.
  • The program launched for small engine repair in about 1000 stores has repaired over 600,000 units YTD 2013. 
  • THD historically ran 40% of store labor on customer service and 60% operational activities.  The have successfully flipped this after a multi-year
  • Craig Menear commented the aging boomer pollution are electing more ‘do it for me’ as they retire which represents an opportunity for the THD service business and growth of their pro channel.  About 10,000 boomers retire each day.   Emerging Gen Y group is at the early stages of DIY and THD must instill confidence and in product and projects.
  • The bifurcation of income in the U.S. creates opportunities for cost conscious consumers and luxury consumers. 
  • TTI (an Accelerated Analytics customer) was discussed as an example of a strategic supply partnership that is creating additional value. 
  • Mr. Menear comments that “We are a branded house and we intend to remain a branded house to satisfy our customers preferences” when discussing the THD private label portfolio.
  • MET is approximately 20,000 associates.
  • Localization of assortments has been proven to help sales and will accelerate in 2014.   Mr. Menear “So we’ve recently begun to use our more sophisticated assortment in clustering tools and there is a lot of runway ahead of us as we integrate this into our core merchandising activities”. 
  • One-third of online orders are getting picked up or fulfilled out of a physical store. 
  • Mark Holifield gave three key goals of the supply chain:
    • Must be in stock [see Accelerated Analytics exceptions reports]
    • Must optimize inventory productivity to drive the best use of working capital [see Accelerated Analytics SKU assortment reports, SKU sales summaries with GMROI]
    • Must be the leader at having the right product at the right place at the right time as the lowest cost in the industry.  [See Accelerated Analytics SKU assortment analysis by market & store]
    • Management expects fiscal 2013 sales to increase by approximately 5.6%, with comp sales growth on a 52 week like-for-like basis of approximately 7%.
    • Management believes the health of the home improvement market rest on two drivers; GDP growth and housing.  U.S. GDP is forecasted to grow about 3% over the next several years based on the Federal Open Market Committee.  Housing turnover is expected to moderate towards the historical average of about 4.6% of units.  Housing prices are up about 11% this year but they are still 23% off their peak back in 2006.  Once homeowners view their homes as an investment, and not an expense management believes they will spend more money on their homes. 
    • In the third quarter of 2013 we saw a double-digit growth in premium price point product. 
    • Approximately 63% of all homes in the U.S. are more than 27 years old.  As homes ages they need repair, which speaks to continued growth in maintenance and repair categories.
    • Management believes we’ve moved past the workout stage of the housing recovery that we shared with you back in June 2012 and we are not in phase II of the recovery.  In stage II of the recovery, we expect ourselves to grow at a rate of GDP plus 2%.