The Home Depot, Inc. is the world’s largest home improvement retailer based on Net Sales for the fiscal year ended February 1, 2009 (“fiscal 2008”). The Home Depot stores sell a wide assortment of building materials, home improvement and lawn and garden products and provide a number of services. The Home Depot stores average approximately 105,000 square feet of enclosed space, with approximately 24,000 additional square feet of outside garden area. As of the end of fiscal 2008, we had 2,233 The Home Depot stores located throughout the United States including the Commonwealth of Puerto Rico and the territories of the U.S. Virgin Islands and Guam (“U.S.”), Canada, China and Mexico. In addition, at the end of fiscal 2008, the Company operated 34 EXPO Design Center stores, two THD Design Center stores and five Yardbirds stores. On January 26, 2009, we announced the planned closing of our EXPO, THD Design Center and Yardbirds stores as part of our focus on our core business.
The Home Depot, Inc. is a Delaware corporation that was incorporated in 1978. Our Store Support Center (corporate office) is located at 2455 Paces Ferry Road, N.W., Atlanta, Georgia 30339. Our telephone number is (770) 433-8211.
We maintain an Internet website at www.homedepot.com. We make available on our website, free of charge, our Annual Reports to shareholders, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5 as soon as reasonably practicable after filing such documents with, or furnishing such documents to, the SEC.
We include our website addresses throughout this filing only as textual references. The information contained on our websites is not incorporated by reference into this report.
Operating Strategy. In fiscal 2008, despite the continuing difficult economic environment, we continued to focus on our core retail business, investing in our associates and stores and improving our customer service. We shifted our focus from new square footage growth to maximizing the productivity of our existing store base. During the year, we implemented significant changes in our store operations to make them simpler, more consistent and more customer-focused. We shifted associate hours to be more customer facing and refocused our efforts on offering every day values in the stores. Additionally, we made several strategic decisions which are intended to optimize our capital allocation, concentrate our efforts on our core business and create long-term value for our shareholders, including our decision to close 15 stores, remove approximately 50 stores from our new store pipeline and exit our EXPO, THD Design Center, Yardbirds and HD Bath businesses.
Customers. The Home Depot stores serve three primary customer groups:
• Do-It-Yourself (“D-I-Y”) Customers: These customers are typically home owners who purchase products and complete their own projects and installations.
• Do-It-For-Me (“D-I-F-M”) Customers: These customers are typically home owners who purchase materials themselves and hire third parties to complete the project or installation, or both. We arrange for the installation of a variety of The Home Depot products through qualified independent contractors.
• Professional Customers: These customers are professional remodelers, general contractors, repairmen, small business owners and tradesmen. In many stores, we offer a variety of programs to these customers, including delivery and will-call services, dedicated staff, extensive merchandise selections and expanded credit programs, all of which we believe increase sales to these customers.
Products. A typical Home Depot store stocks approximately 30,000 to 40,000 products during the year, including both national brand name and proprietary items.
In fiscal 2008, we reduced our inventory while maintaining a favorable in-stock rate. We also reduced a number of one-time discount promotions and refocused our efforts on offering every day values. We continued to introduce innovative and distinctive products to our customers, including Thomasville® deep seating patio furniture, Charbroil® infrared grills, RIDGID® pressure washers and Homelite® trimmers.
To complement and enhance our product selection, we have formed strategic alliances and exclusive relationships with selected suppliers to market products under a variety of well-recognized brand names. During fiscal 2008, we offered a number of proprietary and exclusive brands across a wide range of departments including, but not limited to, Behr Premium Plus® paint, Hampton Bay® lighting, Vigoro® lawn care products, Husky® hand tools, RIDGID® and Ryobi® power tools, Pegasus® faucets, and Glacier Bay® bath fixtures. We may consider additional strategic alliances and relationships with other suppliers and will continue to assess opportunities to expand the range of products available under brand names that are exclusive to The Home Depot.
From our Store Support Center we maintain a global sourcing merchandise program to source high-quality products directly from manufacturers around the world. Our Product Development Merchants identify and purchase market leading innovative products directly for our stores. Additionally, we have three sourcing offices located in the Chinese cities of Shanghai, Shenzhen and Dalian, and offices in Gurgaon, India; Milan, Italy; Monterrey, Mexico and Toronto, Canada.
Services. Our stores offer a variety of installation services. These services target D-I-F-M customers who select and purchase products and installation of those products from us. These installation programs include products such as carpeting, flooring, cabinets, countertops and water heaters. In addition, we provide professional installation of a number of products sold through our in-home sales programs, such as generators and furnace and central air systems.
United States. At the end of fiscal 2008, we were operating 1,971 The Home Depot stores in the U.S., including the Commonwealth of Puerto Rico and the territories of the U.S. Virgin Islands and Guam. During fiscal 2008, we opened 41 new The Home Depot stores, including five relocations, in the U.S.
Canada. At the end of fiscal 2008, we were operating 176 The Home Depot stores in ten Canadian provinces. Of these stores, 12 were opened during fiscal 2008, including one relocation.
Mexico. At the end of fiscal 2008, we were operating 74 The Home Depot stores in Mexico. Of these stores, nine were opened during fiscal 2008.
China. At the end of fiscal 2008, we were operating 12 The Home Depot stores in six Chinese cities.
Certain financial information about our operations outside of the U.S. is reported in Note 1 to the Consolidated Financial Statements.
Store Support Services
Information Technologies. During fiscal 2008, we continued to make information technology investments to better support our customers and provide an improved overall shopping environment and experience. We invested in our supply chain and merchandising tools to improve inventory management capabilities and streamline our operations.
We completed the deployment of a new enterprise resource planning (“ERP”) system to our Canadian division, which includes all stores and distribution centers. We will assess the return on investment and performance of the system in the fiscal year ended January 31, 2010 (“fiscal 2009”) as we evaluate alternatives for our U.S. application footprint.
With regard to our supply chain, we implemented a new warehouse management system to support the U.S. and Canadian stores, continued implementation of a new transportation management system, completed a technology refresh at our distribution centers, and implemented improvements to our Central Automated Replenishment system.
We made improvements to the tools utilized in merchandising systems in the areas of assortment management, forecasting, and replenishment.
With our continued focus on the stores, we provided technology improvements designed to help store associates perform their tasks and improve customer service. We equipped 1,100 stores with new computers, registers and printers, and 920 stores received new paint dispensers.
Credit Services. We offer six credit programs through third-party credit providers to professional, D-I-Y and D-I-F-M customers. In fiscal 2008, approximately 3.2 million new The Home Depot credit accounts were opened, and the total number of The Home Depot active account holders was approximately 12.5 million. Proprietary credit card sales accounted for approximately 28% of store sales in fiscal 2008. In fiscal 2008, Home Depot re-negotiated and extended the term of the primary contracts governing the programs. The new contract with Citibank established a ceiling for the cost of credit for the program while retaining the ability for portfolio performance improvements to lower the cost of credit.
Logistics. Our logistics programs are designed to ensure product availability for customers, effective use of our investment in inventory and low total supply chain costs. At the end of fiscal 2008, we operated 30 lumber distribution centers, 45 conventional distribution centers and five transit facilities, all located in the U.S., Canada and Mexico. Additionally in 2008, we opened four new Rapid Deployment Centers (“RDC”) in the U.S., bringing our total number of RDCs to five. We now serve approximately 25% of our U.S. stores from RDCs. RDCs allow for aggregation of store product needs to a single purchase order, and then rapid allocation and deployment of inventory to individual stores upon arrival at the center. This process allows improved transportation, simplified order processing at suppliers and reduced lead time from the time that product needs at stores are determined to actual replenishment. We plan to open additional RDCs during fiscal 2009 and 2010 and ultimately serve all of our U.S. stores from RDCs.
In fiscal 2008, approximately 35% of the merchandise shipped to our U.S. stores flowed through our distribution facilities. The remaining merchandise was shipped directly from suppliers to our stores. The expansion of the RDC network is expected to increase our distribution utilization. In addition to replenishing merchandise at our stores, we also provide delivery of in-stock and special order product directly to our customers.
Associates. At the end of fiscal 2008, we employed approximately 322,000 associates, of whom approximately 22,500 were salaried, with the remainder compensated on an hourly or temporary basis. Approximately 65% of our associates are employed on a full-time basis. We believe that our employee relations are very good. To attract and retain qualified personnel, we seek to maintain competitive salary and wage levels in each market we serve.
Intellectual Property. Through our wholly-owned subsidiary, Homer TLC, Inc., we have registered or applied for registration, in a number of countries, for a variety of internet domain names, service marks and trademarks for use in our businesses, including The Home Depot®; Hampton Bay® fans, lighting and accessories; Glacier Bay® toilets, sinks and faucets; Pegasus® faucets and bath accessories; and Workforce® tools, tool boxes and shelving. We have also obtained and now maintain patent portfolios relating to certain products and services provided by The Home Depot, and continually seek to patent or otherwise protect selected innovations we incorporate into our products and business operations. We regard our intellectual property as having significant value to our business and as being an important factor in the marketing of our brand, e-commerce, stores and new areas of our business.
Quality Assurance Program. We have both quality assurance and engineering resources who oversee the quality of our directly imported, globally-sourced and proprietary products. Through these programs, we have established criteria for supplier and product performance that are designed to ensure our products comply with federal, state and local quality and performance standards. These programs also allow us to measure and track timeliness of shipments. These performance records are made available to the factories to allow them to strive for improvement. The program addresses quality assurance at the factory, product and packaging levels.
Environmental, Health & Safety (“EH&S”). We are committed to maintaining a safe environment for our customers and associates and protecting the environment of the communities in which we do business. Our EH&S function in the field is directed by trained associates focused primarily on the execution of the EH&S programs. Additionally, we have a Store Support Center-based team of dedicated EH&S professionals who evaluate, develop, implement and enforce policies, processes and programs on a Company-wide basis.
Environmental. The Home Depot is committed to conducting business in an environmentally responsible manner and this commitment impacts all areas of our business, including store construction and maintenance, energy usage, product selection and customer education.
In fiscal 2008, we spent approximately $27.5 million for energy efficiency related projects. By replacing HVAC units in approximately 200 existing stores and switching to the use of T-5 lighting in approximately 700 existing stores, we estimate cumulative savings to be approximately $28 million since fiscal 2006. In addition, we have implemented strict operational standards that establish energy efficient practices in all of our facilities. These include HVAC unit temperature regulation and adherence to strict lighting schedules, which are the largest sources of energy consumption in our stores, as well as utilizing the Novar Energy Management and Alarm System in each store to monitor energy efficiency. We estimate that by implementing and utilizing these energy saving programs we have avoided 1.6 billion pounds of greenhouse gas emissions since fiscal 2006. We believe this is equivalent to removing approximately 132,000 cars from the highway. In June 2008, we launched a nation-wide in-store compact fluorescent light bulb recycling program. This service is offered to all customers free-of-charge and is available in all U.S. stores, including Alaska and Hawaii.
We have also taken additional measures to further our sustainability efforts. We partnered with the U.S. Green Building Council and have built seven Leadership in Energy and Environmental Design (“LEED”) green certified and equivalent stores. We offset the carbon emissions created by our facilities and a portion of those emissions created by business-related travel through an agreement with The Conservation Fund that resulted in the planting of thousands of trees that will help reduce the heat-island effect in urban areas, reduce erosion and help clean the air. Through our Eco Optionssm Program, we have created product categories that allow consumers to easily identify environmentally preferred product selections in our stores. We implemented a Supplier Social and Environmental Responsibility Program to ensure that our suppliers adhere to the highest standards of social and environmental responsibility.
Seasonality. Our business is seasonal to a certain extent. Generally, our highest volume of sales occurs in our second fiscal quarter, and the lowest volume occurs during our fourth fiscal quarter.
Competition. Our business is highly competitive, based in part on price, store location, customer service and assortment of merchandise. In each of the markets we serve, there are a number of other home improvement stores, electrical, plumbing and building materials supply houses and lumber yards. With respect to some products, we also compete with discount stores, local, regional and national hardware stores, mail order firms, warehouse clubs, independent building supply stores and, to a lesser extent, other retailers. Due to the variety of competition we face, we are unable to precisely measure the impact on our sales by our competitors.