The Home Depot, Inc. (NYSE:HD)
Annual Meeting of Shareholders
May 22, 2014 9:00 AM ET
Frank Blake - Chairman and CEO
Lynne Giles - Myra K. Young
Lynne Conley - Benedictine Sisters
Unidentified Company Representative
Ladies and gentlemen, please welcome, Chairman and CEO, Frank Blake.
Alright. Good morning. And welcome to the 2014 Annual Shareholders Meeting. Thank you all for joining us. Before we start the meeting I would like to make a few introductions. First it’s my pleasure to introduce our Board of Directors. I hope you had a chance to meet them earlier this morning. They are Duane Ackerman, Ari Bousbib, Greg Brenneman, Frank Brown, Al Carey, Armando Codina, Helena Foulkes, Karen Katen, Mark Vadon and our Lead Director Bonnie Hill. I’d also like to introduce Wayne Hewett who has been nominated for election to the Board at today’s meeting.
Next I’d like to just take a minute to recognize Bonnie Hill who is retiring from our Board today, exactly. She has been a member of our Board since 1999 and our Lead Director for the past six years. In addition to being just an outstanding director and setting the standard on corporate governance, Bonnie has provided all of us an active example of living our values. Bonnie has worked side-by-side with our store associated at volunteer projects across the country. Last week she did just that at the greater Los Angeles, Navy Village a housing project for veterans and their families. We dedicated a new garden at the Navy Village in honor of Bonnie’s service to the Company and I have a brief video of that event that I’d like to share with all of you.
Please join me in thanking Bonnie for her service to The Home Depot. Thank you, Bonnie. Greg Brenneman who served on our Board since 2000 will be our Lead Director following his reelection at today’s meeting. The members of our Senior Leadership team are also present and I’d like to ask them to stand. Finally, I’d like to recognize David Middendorf and Hector Mojena of KPMG the Company’s independent auditor.
We’ll begin today’s meeting with the formal business portion this consist of the election of directors named in the proxy statement, ratification of auditors and consideration of the Company and shareholder proposals. After that I will provide a brief business overview and then open the floor for questions. So I now officially call the 2014 Home Depot Annual Meeting of Shareholders to order.
Teresa Wynn Roseborough our General Counsel and Corporate Secretary is serving as secretary of the meeting and Broadridge Investor Communications Solutions is our inspector of elections. As of March 24, 2014 which is the record date for the meeting there were approximately 1.4 billion shares of the Company’s common stock entitled to vote. A majority of these shares is needed for a quorum, over 85% of the shares are represented today therefore we have a quorum.
If you haven’t voted yet and would like to vote today, please raise your hand now so we can give you a ballot. We’ll collect your ballots after all the proposals have been presented. If you’ve already voted you don’t need to vote again. I now declare the polls open for voting, or you could raise your hand if you need a ballot.
Okay, great. The first item of business is the election of directors which is Item 1 on your ballot. The Board has nominated the individuals names in the proxy statement to serve for one year term through the 2015 annual meeting. Your Board recommends that you vote for each of these directors.
We’ll now move on to the next proposal. The next item is the ratification of the appointment of KPMG as the independent auditors of the Company for fiscal 2014, Item 2 on your ballot. Your Board recommends that you vote for this proposal. The next item is the advisory vote on executive compensation also known as say-on-pay, which is Item 3 on your ballot. Specifically you are being asked to approve the compensation of the Company’s named executive officers as disclosed in the proxy statement for this meeting. Your Board recommends that you vote for this proposal. The next item is the consideration of the shareholder proposal regarding special shareholders’ meetings, Item 4 on your ballot, will Ms. Lynne Giles the representative of Ms. Myra Young, please step to the microphone and present the proposal.
Shareholder proposal regarding special shareholder meetings, Item 4 on the proxy card, sponsored by Myra K. Young of Elk Grove California, resolved shareowners ask our Board to take the steps necessary unilaterally to the fullest extent permitted by law to amend our bylaws in each appropriate governing documents to give holders in the aggregate of 15% of our outstanding common the power to call a special shareowner meeting. This includes that such bylaw and or charter text will not have any exclusionary or prohibited language in regard to calling a special meeting that apply only to shareowners but not to management and/or the Board to the fullest extent committed. This proposal does not impact our Board’s current power to call a special meeting. Special meetings allow shareowners to vote on important matters such as electing new directors that can arise between annual meetings. Shareowner input on the timing of shareowner meeting is especially important when events unfold quickly and issues may become moot by the next annual meeting. This proposal topic won more than 70% support at Edwards Life Sciences and SunEdison in 2013. Please vote to protect shareholder special shareowner meetings proposal four.
Thank you Ms. Giles. Your Board recommends that you vote against this proposal. The next item, consideration of the shareholder proposal regarding employment diversity reports is Item 5 on your ballot. Will Ms. Lynne Conley the representative of Benedictine Sisters and the other proponents please step to the microphone and present the proposal.
Good morning, Mr. Chair, members of the Board and shareholders who are gathered here today. I am Lynne Conley here today representing the Benedictine Sister from Boerne, Texas. I also represent several members on the Interfaith Center on corporate responsibility who are shareholders and co-filers to this proposal. These groups are long-term shareholders of Home Depot. Proposal number 5 on the ballot seeks a Board review of our Company’s policies regarding disclosure of equal employment opportunity data known as EEO1 data and public reporting of diversity issues to shareholders.
Equal employment opportunity is an investment concern, when allegations of discrimination in the workplace burden shareholders with costly litigation and added risk to a Company’s brand, there is an impact to shareholder value. We contend descriptions don’t go far enough to mitigate potential risk. We mentioned in the resolution that Home Depot has paid out more than $100 million to settle discrimination law suits over the past 16 years. We appreciate that Home Depot has published a diversity and inclusion report in March 2013. We reviewed it and felt it do not meet the conditions asked for in our resolution. We are asking for statistics not more photos.
The report did not give a chart identifying employees by gender and race in each of the EEOC defined categories. This resolution which has been filed over the past several years focuses on the importance of measurement and disclosure of diversity issues to its shareholders, to manage diversity companies have to be able to measure it. That is why we have asked for EEO1 data which offers investors a measurement tool and EEO reported the Equal Employment Opportunity Commission providing data to shareholders would not pose an added financial burden.
The Company actually did provide the information for one year and then stopped. In the absence of meaningful disclosure investors cannot fully assess potential risks Home Depot faces nor for that matter fully identify successful diversity efforts. Moreover, while other brand name companies have advanced transparency measures in place we feel that Home Depot has lag, Intel, Merck, Coca-Cola and Walmart to name a few, have been disclosing EEO data for at least the past five years. We feel this is a bottom-line issue affecting competitiveness and market share. We ask Home Depot to report diversity disclosure to all shareholders. We met with the corporate secretary and others to offer a way forward for 2014. We continue to hope that management will take us up on the ideas we have presented. Thank you for the time. And we ask you to vote in favor of stockholder proposal number five.
Thank you, Ms. Conley. Your Board recommends that you vote against this proposal. If you have requested a ballet please mark your vote and sign it where indicated when you’re finished please raise your hand and one of our volunteers will collect your ballet.
Alright. The Ballots have been collected and the polls are now closed. I’d like now to review the preliminary results with you. All of the director nominees named in the proxy statement have been elected by a majority of the votes cast, approximately 99% of the votes cast have voted in favor of the ratification of the appointment of KPMG. Approximately 98% of the votes cast have voted in favor of the compensation of the Company’s named executive officers. And the shareholders proposals, approximately 44% of votes cast have voted in favor of the shareholder proposal regarding special shareholder meetings and approximately 25% of the votes cast have voted in favor of the shareholder proposal regarding employment diversity reports.
Based on the preliminary vote count all the nominees for the board of directors have been elected. The appointment of KPMG as the Company’s independent auditors for fiscal 2014 has been ratified and the majority of votes cast approved for our executive compensation and neither of the shareholder proposals have been approved. Please note that ballots collected at this meeting will be verified and tabulated by our inspector of elections and final results of the vote will be available in the Form 8-K which we’ll file next week.
This concludes our formal business, and I declare the meeting adjourned. Now we’ll move to an overview of our business and following that any questions that you may have.
So, I am not going to read this. But please be advised that there may be forward-looking statements in this presentation.
Fiscal 2013 was not only our fourth consecutive year of positive comps but also our strongest year in over a decade. We posted our best comp sales growth in 14 years. Total company comp sales were up 6.8% and comps for our U.S. stores were positive 7.5%. On a 52 week to 52 week comparison your company grew $5 billion in one year. We saw growth in ticket and transactions. Our net earnings increased 18.7% and our diluted earnings per share increased 25.3% to $3.76. And your company continues to generate strong cash flow. We generated $7.6 billion in cash in fiscal 2013 and we issued $3.9 billion in incremental debt taking advantage of the interest rate environment. We spent $1.4 billion on capital improvements. We returned $2.2 billion to shareholders through dividends and repurchased $8.5 billion in shares, leaving $1.9 billion in cash.
Along with delivering better than expected financial results in fiscal 2013, we announced a 21% increase in the quarterly dividend, our fifth increase to the dividend in as many years. And as you can see our yield is well above the S&P retail average. In fiscal 2013, Home Depot stock appreciated 14% and we outperformed the Dow Jones industrial average for the sixth consecutive year.
Our business strategy is based on what we call our three legged stool. Borrowing from Jim Collins, Good to Great, we start with what we’re passionate about, customer service then when what we want to be best in the world at, product authority and home improvement, and what drives our economic engine, disciplined capital allocation and productivity and efficiency. The element that ties this together is represented on this chart as interconnected retail. Enormous changes of impacted retail in the Home Depot over the last several years, changes in customer expectations, changes in our competitive framework, changes in our business model but the three legged stool sets out a pretty enduring strategic construct.
The first leg is customer service. Customer service starts with investing in our associates. We pay our associates an above market wage rate and we are the only major retailer in the country that provides stock grants, over and above salary and a cash bonus to our assistant store managers. And in 2013 we paid out a record of almost a $0.25 billion in success sharing, our profit-sharing program for our hourly associates. We are also adjusting our learning and training efforts to incorporate interconnected retail making our virtual store presence part of our customer-first training. We’re upgrading technology in the store to take advantage of the interconnected capabilities now available. And finally we are focusing on the importance of our pro-customer. In the past year we rolled out programs that improve our day-to-day service to these customers and help them build their businesses.
For Home Depot, the journey on product authority began with fundamental restructuring of our supply chain. We have developed a new supply chain network with our rapid deployment centers or RDCs. The next step is a new DC network for our dotcom business as well as a new platform for store delivery for the last mile. We opened our first distribution facility for dotcom earlier this year, just an hour south of here in Atlanta. It has over 1 million square feet. We will open another on the West Coast later this year and in the Midwest next year.
Developing our technology, assortment planning, space allocation and pricing, all of these have been an important part of establishing product authority. It is what we call over merchandising transformation. We are now at a point where the tools are largely in place and we can begin to use them to create additional value for our customers, associates and shareholders. These developments are the enablers for the larger portfolio strategy we have been working on and the focus of our merchandising strategy remains the same, winning through value, innovation and speed-to-market.
On interconnected retail, with our online business, our goal is to improve trafficking conversion in our stores and vice versa. And one of the major efforts we have undertaken over the last few years has been creating that technology platform that will support a seamless customer experience, whether shopping online or in-store. Our dotcom business is now over $2.7 billion and grew last year over 50%. We are very pleased with the progress we are making. We have more to do though and this remains one of our major areas for investment in 2014 and beyond.
We are investing to improve the core functionalities of our site as well as our mobile Web and mobile app capabilities. We sometimes refer to the smartphone as a store in a pocket. Unlike the physical store the virtual store requires constant upgrading. Our ongoing objective is to keep improving the ease of use personalization and connectedness of our online experience.
In Canada, Home Depot is the number one home improvement retailer. We had our second year of positive comps in fiscal 2013 and continue to show improved performance. We are in the process of transforming our supply chain in Canada and we opened our first Canadian RDC earlier this year. In Mexico, Home Depot is also the number one home improvement retailer. We started in Mexico 12 years ago. We now have over 100 stores. This has been a great success story for us. And Ricardo Saldivar and his team have produced positive comps for 42 quarters in a row.
Our shareholder return principles are straightforward and haven’t changed over the last several years. We will invest to maintain and grow our business. We look to increase our dividend every year targeting a payout ratio of 50% of net earnings and we will return excess cash to our shareholders through share buybacks.
Now, let’s look at the fiscal 2014 outlook. We continue to see strengthened core of our stores and for the year we project sales growth of approximately 4.8%. We expect our comp store sales to be up approximately 4.6% in 2013. For the year we’re planning to open seven stores with five of those stores opening in Mexico. We expect diluted earnings per share to increase 17.6% to $4.42 including the impact of $5 billion in share repurchases. Our overall strategy has not changed we will continue to invest in customer service, product authority and interconnected retail with an overall focus on a disciplined capital allocation strategy creating value for our shareholders.
I want to close with two very important Company symbols the Inverted Pyramid and our Values Wheel. The power of the Home Depot starts with the power of being a values based business. We believe that if we take care of our associates and take care of our customers everything else will take care of itself. Since this coming weekend this Memorial Day weekend it’s appropriate to take a moment highlight some of our activities since 2013 that were directed to benefit our country’s veterans. In over 750 cities across the country our associates prepared and rehabbed more than 400 homes. We provided cash grants of nearly $29 million to 100s of non-profits specifically serving veterans.
In 2011 we committed to investing $30 million to non-profits to specifically address veterans housing needs. In 2012 we hit that target and increased our total pledge to $80 million. To-date we’ve invested nearly $66 million on behalf of our veterans. It is our way of saying thank you and giving back to our community. I hope you are proud of your Company and I thank you very much for attending this meeting.
At this time, I’ll take any questions that you have. If you have a question please step to one of the microphones. Thank you.
Good morning Mr. Chairman. My name is Jim White from Philadelphia. And shareholders thanking you for great results and I appreciate your good work. I am a customer, my firm JJ White is a contracting firm in the Midwest to Mid-Atlantic we’re a customer of Home Depot and we have used Home Depot cards as safety incentives for a number of years and have been a great success with our employees. So thank you for that. And I just wanted to find out how we could come together not only in understanding is Company interested in being a better customer to Home Depot as also potentially interested in being a service provider to Home Depot. Is there somebody that leads your supply chain in terms of your real estate and stores is that Marvin Ellison that I could talk to and then somebody in your sales side that could deal with more of the commercial accounts that we do since we do commercial contracting? Thank you very much.
Thank you very much Mr. White, thank you for doing business with us and what a perfect venue to ask because we’ve got pretty much everyone here. So, what I would say is after this meeting we have our head of our pro-business J. T. Rieves here and he will talk to you about your commercial business. We also have Carol Tomé who is our CFO and in-charge of real estate and she can talk to you about any real estate opportunities and.
Thank you. And where are they located?
They’ll find you.
Great, thank you very much.
Thank you very much.
Good morning Mr. Chairman. My name is Charles Miller. I’ve been a stockholder in Home Depot since 1982 and I’ve never asked you a question in all the time that we’ve actually met at these meetings. First of all I want to congratulate you on the great results for Home Depot for this most recent year. Secondly, I want to congratulate you and with just mutual congratulations and ask nobody if a cut.
My sister lives in England and is a great Arsenal fan so shares that congratulate you.
The first, of three questions I would like to ask you if you don’t mind as I’ve never asked a question here before. The first question is what is the single biggest corporate concern that keeps you awake at night or that steers your Board to controversy or conversation, that’s my first question? The second question is that there seems to be a major demographic shift back from the suburbs to the cities throughout the country. And how is Home Depot adjusting to this shift? In places like Europe it seems that particularly in a place like Germany there is no aspiration amongst young people to earn homes but to rent homes and with apartment developments in this country are you seeing some change in aspirations of young people regarding ownership?
The third question is relating to IKEA and COSCO who have developed very successful corporate models to export to places like Asia and Europe and throughout the world in general. Home Depot has a somewhat indifferent record in this regard other than for Canada and Mexico, with possibly the most notable problem being in China. And what is Home Depot doing to expand internationally and what is your thinking regarding these changes? Thank you.
Thank you very much. And thank you for those three very thoughtful questions. I’ll take them in order, on the first question in terms of the single biggest concern, I would say it’s not so much something that keeps us or the Board awake at night, but we do understand that the environment of retail is changing and changing rapidly because of the dotcom and if you looked at where your company is making its major investment, as I outlined our major investments are focused on making sure that we have absolutely the best, what we call interconnected experience, that experience between researching or buying online, picking up something in the store, researching in the store, that that is all interconnected, because we believe that that’s going to be an enormous competitive advantage for us in the decade ahead. So it’s not so much a concern. It’s an opportunity that we are very much leaning into and investing towards.
On the demographic shift of the cities, we would say it’s interesting, it’s sort of ebbs and flows in the United States, in fact there is an article in today’s Wall Street Journal that was on the opposite side of that of people moving back to the suburbs. The great thing about your company is that we have over 2,200 stores, we have stores in very urban areas, we have stores in very rural areas, and were able to shift our resources to adjust to wherever our customers are moving because of the great scope and breadth that we have in our stores across North America.
And finally on the international opportunity, you’re quite right. We closed our efforts in China a little over a year and half ago. We were never able to make that very successful. We do have extremely successful businesses in Canada and in Mexico as well as the United States. And we’re really focused on making our North American presence better. We see continued opportunities in North America and as I mentioned at the very start, in one year your company grew $5 billion based on of focusing intensely on our North American opportunities. We plan to continue to do that because we think that’s where the largest opportunities are for us at the moment. But thank you very much for all of those questions.
Yes, welcome back, good to see you.
My name is Evert Santa Maria, and my family is a big-big buyer of Home Depot, like we go there almost like 3 times a week.
My brother is like a living -- my little brother Carson, he is like living commercial, like we have run out of gas for the leaf lawn-mower and my dad will think, where can we buy some more, and Carson to longer will look up, he says well you know the Home Depot commercial says you can buy so and so gas here for a so and so price, on sale. So maybe we should go to Home Depot.
There you go.
My mom, she like gardens, she like mows and tree cutter thing, and my brother loves to help with the leaf blower and he loves the backpack leaf blowers, for some reason he thinks that’s is the most hi-tech…
It sounds like he’s a handy brother to have around.
He thinks they’re the most hi-tech gardening tool there is. And he’s always using them, but my mom is always, have to holding it up, so he won’t fall backwards. So I was thinking maybe you could sell more like leaf blowers and backpack blowers, if you could make different sizes. Because there are a lot of people like and children who love gardening and stuff like helping outside in construction, and if you made different sized blowers, you could sell more.
Evert, thank you very much for the comment. Thank you particularly for making this, two meetings in a row. I very much appreciate your interest in the Company and very much appreciate your entire families’ commitment to the company, and maybe next year it’ll be three visits a week, if we do our job right. And I’ll take the comment on continuing to provide more opportunities. And we actually have some very-very lightweight blowers that you might want your younger brother to get appointed with. That will help him with the blower. Thank you, thank you for the comment, Gary good to see you again. Welcome back.
Thank you very much. Frank…
You might want to -- we do this annually but you might want to introduce yourself.
Okay I am Gary Patten from Store 1119 in Greenville South Carolina. Hoping to one day get to Store 1104 in Greenville South Carolina, but it’s just so much closer to my house and everything. I’ve been buying stock since ’92 my wife and I have been buying and selling stocks since ’01. I sold more than I wish I hadn’t sold because you’re doing such a great job with the company and I thank you for that. I’ve been asking you questions since your very first meeting here seven or eight years ago, I am not sure. I want to thank you, I have two small children and are taking more and more of my time during this week, graduation, harder to come down to Atlanta from Greenville, but I want to thank you for allowing me the opportunity to come up here and ask a question every year, not having to pre-submit it or anything like that because that would not have worked if I kind of do it off the cuff.
You’re doing a good job and I’ve been able to tell you that in person and thanks to all your leadership, but I just wanted to say that if I’m not able to make it back, I’ve really enjoyed the experience. I feel like Home Depot is my family, I’ve been here since ’92. You know how many companies can you really, just of salesman of the floor or a small peon of an employee you might say come to something like this and express yourself and I’m sure that has helped me personally in my career in everything because I remember the first couple of years how nervous I was, helping my public speaking hopefully. But anyway I wanted to thank you very much and we appreciate you.
Thank you very much Gary. It’s always a pleasure to see you here. Thank you.
Hi, my name is Wellington Lee. I know in the past the philosophy of a stock split has been when the stock got around 40, it split. We end up beginning years, what is your philosophy and the Board’s philosophy on the stock split?
Do get asked that question a good deal, we really don’t see the benefit from a split, the shareholder’s in the same spot pre and post split and there are some costs associated with it and now as trading has changed overtime and it’s easier to buy smaller lots of shares, we don’t think that there is a great value provided to the shareholder either. So wouldn’t be anticipating a share split.
Okay, thank you.
Thank you very much for that question. Thank you all very much, for taking of your time, to participate in this meeting and I very much look forward to the 2015 annual meeting, thank you.