The Home Depot Management Presents at ISI Retail Summit (Transcript)

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The Home Depot (HD)

ISI Retail Summit

March 20, 2013 12:30 PM ET

Executives

Joe McFarland - President

Analysts

Greg Melich – ISI

Presentation

Greg Melich – ISI

So for the benefits of the webcast because Home Depot’s presentation and Q&A is being webcast. I’m Greg Melich, I’m the Hardlines Retail Analyst for ISI and it's our pleasure to have with us today Joe McFarland who is the President of the Western Division of Home Depot, certainly a big important division one that as we have been learning we think we’re doing pretty well from our store watch piece so just should be doing pretty well. Joe has been with Home Depot 19 years, he started working up from the bottom of the stores and therefore has a great line of experience for a while around the New York Metro area so he still loves to talk about the Paramus, New Jersey or the Norwalk Connecticut stores so if anybody has any (inaudible) for me loves to hear about the old stomping grounds and with that Joe thanks a lot for coming. Appreciate it.

Joe McFarland

Well thank you for having me here today. I’m not going to read this but please be aware, be cautioned regarding our forward-looking statements. So as Greg said my name is Joe McFarland, President for the Western Division. You see the Western Division outlined in orange, so I’m responsible for 500 stores in the Western Division, 75000 associates. One thing I think is pretty unique about the Home Depot is as you look at the three core U.S. divisions all three division President’s for our company started as hourly associates. So we have a very good understanding of what the trials and tribulations that are associates go through and we continue to make changes in our business continued to make things focus on simplicity, simplicity of the message, simplicity of the task at hand. I think that really has a lot to do with some of the success that we continue to see.

A lot of you have seen this slide before but I would like to remind of our three-legged storm the way that we view our business. So represented in the first leg is really what we’re passionate about as a company and we’re passionate about customer service in all aspects. The thing that we’re best in the world at which is represented by our second leg of the stool which is our products and product authority and the third leg of our stool is really our discipline capital allocation and that really drives productivity and efficiency in our business and we have added the seat to the stool and is represented by the interconnected retail that we’re really focused and it really attaches all three legs of our stool together.

I’m going to switch gears a little bit to the operational plan that we have today as a company and you will see it's represented by customer service in stock and store appearance and this operational plan we have put in place since 2008 and throughout the years being the Home Depot for over 19 years, we have had a lot of operational plans and success of this operational plan is that it is simple. We’ve taken a very simple approach so that our store managers write down to the hourly associate and understand what the important things and what the important portions of our business are and the areas that we would like everyone to focus on. So at customer service and we have outlined our customer service expectations in 2008 we rolled out and instituted a program that we call FIRST and that really represents it's an acronym that helps all of our associates understand what it is we mean when we talk about that customer service and we have invested over 100 million hours of training in customer service in the last several years and everyone in our organization received the exact same training so Frank Blake write down to the hourly associates in the store. We all went through the same version of training and we really have everyone connected and on the same page as it relates to the importance of service with our stores.

I think that has been certainly a big driver of our business. Secondly as end stock and our focus on end stock how fast we recover, how fast we keep product on the shelf and as you know customers come in to buy product and it's just a huge disservice if they can’t get the product when they come in and then finally store appearance and we defined store appearance for our associates and our managers and then in the past you have come into our stores and the store, the service levels may have been par and the end stock may not have been there but you would see balloons, you would see crazy signs all sorts of banners and so we have really taken the step to define to what we’re looking for in store appearance in a way that we really outline that is our 70-30 philosophy and so our operational plan that’s a 70%.

We want every store operating on a very core set of expectations and then we allow the 30% the entrepreneurial spirit and we often define it as cake in icing so that 70% represents the cake and once you have made that cake we give you the autonomy to do things unique to your areas to do things unique to your customer subset and that’s the icing that we have put on the cake.

Talk about our store payroll and you have heard us talk in the past about our efforts for 60-40 and to define this 60-40 efforts in the past if you look at 2008 you see the numbers 45 and 55 and that represents that in 2008 we have 45% of our store labor focused on service and 55% of our store labor focused on tasks and so we have been on a journey of reengineering on putting systems in place, improving our operational efficiencies to get to this journey of 60-40 where we will have 60% of our store payroll focused on service and 40% focused on taxes.

Now we have been able to do this through improvements we have made in the business, an example of that would be our return to vendor clerks. So in every store across United States we have 40 hours of payroll that’s sat in our receiving areas inside of a cage and for 40 hours a week they have spent processing returns to our vendors. We have been able to put our RLCs in place and along with the RDCs we have efficiencies and backhauling the returns to vendors to three center locations across the U.S, thus we have been able to take that 40 hours of payroll out of our back receiving areas and put that back to a customer facing and so we have got many examples of different things that we have done, different steps that we have taken along the way and proud to say that early in 2013 we will achieve our goal of 60% of our store payroll that will be customer facing with 40% focused on tasks.

Our customer engagement, we’re different from a lot of retailers out there. We’re not a product retailer but more of a project retailer. So our focus is wherever the customer wants to shop however the customers wants to shop we need to be there for them and I’m going to thank as I showed the three legged stool earlier in the slide that interconnected experience is something that we have been really focused and we know what a significant portion of our business that will be as we move forward.

From an emotional connection standpoint this is one of our internal campaigns and you know there is everyone has an opportunity to shop where they want to shop to purchase how they want to purchase and we have really asked our associates to engage customers in an emotional connecting way and in an emotional connecting way we define as doing the unexpected something that as a customer comes into the store that they simply are not expecting. You know we have a lot of examples building wheel chair ramps for customers, you know putting new roofs on customers houses, a lot of big projects but where the focus really is the smaller things within side the (inaudible) and now we got a great example email to me from a store manager last week and it was an emotional connection we have one of our associates in our flooring aisle and there was an elderly couple shopping for a vacuum cleaner, the elderly couple reminded this associate of their grandparents and instead of just selling that vacuum cleaner to this customer and to this couple the associate took the time to take the vacuum cleaner out of the box to put the screws in to assemble the vacuum cleaner, to hook the bags up and to show the customer how to use it. And we really defined that as having that emotional connection with the customer and really being able to take service to a new level.

We’ve several recognition programs that we have instituted across the organization and the first one you will see our Homer Award and that’s really for exceptional customer service. We send Homer Awards out to every single one of our stores on a monthly basis and ask our store managers to reward great service. We have several different layers of our Homer Awards. We have gold silver and platinum and just really represents for the associates of job well done and other associates are able to observe the associates with the large stacks of Homer Awards to really see what great service looks like. In addition we’re making emotional connection. This is something that we recognize on a monthly basis there is a (inaudible) that comes out from both Frank Blake and Marvin that goes into the break room that really tells a story for those associates and we actually tell the story of making that emotional connection on our weekly broadcast.

Then next you will see is our Team Depot and as you know we do a lot within our communities, we encourage our associates to be out there in the communities making a difference very involved with veterans organizations and then finally our home depot legends and these are true examples that happen every single day within inside of the four walls of our stores.

So the Home Depot legends we recognize these individuals again on our weekly broadcast and that’s the way that we start out every weekly broadcast to our store management team is with the home depot legends telling these great stories, sharing the great stories so people know what we mean when we talk about outstanding service. Just take a look at since 2008 a lot of things that we have put in place have talked about the engineering of our labor standards, I have talked about the recognition programs, a lot of different things. So as you look at our net promoter score, very pleased with our progress on our net promoter score. You can see that we’re up over 40% since 2008 and then within our LTR same way very pleased at the results that we continue to see week over week, month over month, year-over-year.

Switching gears to just recap our 2012 financial results, you see 6.2% increase really driven by a mix of both ticket as well as transactions. The 10 basis point improvement in our gross margin, really lot of that driven by our supply chain efforts and a great work that Mark Holifield and our supply chain continue to do and they are really dropping down to the bottom line in our diluted earnings per share, 21% increase in earnings per share with inside 2012. So certainly very pleased with the way that our business has trended in 2012. We think we will continue to see that momentum in 2013.

Here is our financial targets for 2013, sales growth of 2% and that really is in line with GDP and we have forecast our business based on the GDP forecast, there may be upside we don’t get a lot of questions on do we have a conservative view, we may have a conservative view however I think for our organization we’re certainly aligned that should the business trend higher than that and that we have the ability to react, we have the ability to react from hiring standpoint we have the ability to react from a product standpoint, we feel pretty good about our early read on 2013.

We do plan to open two new stores, there are nine new stores in the company for 2013 you see seven of those in Mexico, two in the United States. Gross margin expansion will be moderate and then finally our diluted earnings per share, we’re looking for a 12% increase in our earnings per share. So with that I think we’re reading for questions.

Question-and-Answer Session

Greg Melich - ISI

So I wanted to kick it off with a few of them certainly open it up to the group. You mentioned at the end how this looks pretty good so far this year. ISI had a store watch piece we put out last week that look at the western markets really look strong. You mentioned that you’re there to take care of its stronger, could you give us any insights that you’re seeing across you’re regions that make it different that the east or the south-east or the mid-west in terms of how the consumer is coming back or not, which markets are performing better, what sort of change versus 12 months ago anything on that front will be helpful.

Joe McFarland

Sure, so the thing about the western division some of the markets that we have Las Vegas certainly the market we’re in here Phoenix, Southern California, Los Angeles and right up through the San Francisco Bay. Some of those markets were the hardest hit in the housing downturn, we have seen our pro-business continue to grow and for the first time in Q4 we saw our pro grow at the same rate as our consumer. We certainly have pockets within side the western division that pro grows equal to or better than the consumer growth in areas that’s small pro continues I think to have a lot more jobs in the Q being able to choosing the jobs that they want to do today versus taking on everything in the past and I think that really helps propel both the pro-business as well as the do it yourself business.

Greg Melich - ISI

Another question or maybe going a little bit more of your store base initiatives you talked about three legs of the stool and then how the metrics used to be, I know if you said this but it used to be like 25 metrics and they have sort of five. Assuming five is easier to execute on the 25 but the, what has changed in terms of technology and you mentioned Mark in the distribution system. What’s changed there that you see, you still have a lot of leverage if you can do with the store and the operations and execution level.

Joe McFarland

So I think couple of things, you mentioned metric and we were a company that was very, very metric driven. We had people that operated across the U.S. and we called it no one had the same version of the truth, everyone looked at the things differently. Even from sales to down to operating profit. We standardize what that looks like across the company, we have one score card that is measured from total U.S. a right down to each individual store and everyone is aligned now around the same metrics, for 2013 we actually reduced metrics on our score card by almost 40% so not stopping at where we have been but continuing to take complexity out of our business continuing to try to make our business model simple for our associates to better understand.

Greg Melich - ISI

Can you share what those metrics are?

Joe McFarland

Metrics we look at sales, we look at comp sales, we look at our store mark down performance we look at shrink, and then we also focus every quarter on key categories and so we focus on six different categories across the entire organization. We measure these categories every single week, they are really our top sales driving categories and our top gross margin driving categories.

Greg Melich - ISI

Certainly four key metrics but then you layer in.

Joe McFarland

You layer in some of those drivers.

Greg Melich - ISI

And another one I want to make sure we got into things start to hopefully normalize or get better have you guys cut a lot of stores that before and really (inaudible) is there an opportunity from what you can see in the west they actually started to grow stores again or do you how much better it has to be before you go serve your customer right and the optimize returns we actually need to start building more than two stores in the U.S.

Joe McFarland

That’s a challenge and you know our view on the U.S. is that we have reached on a saturation, we don’t see an opportunity to continue to plus stores in and we had that period we’re opening a 100 stores a year prior to that we opened up a new store every 44, hours, I think those days for us have certainly passed and our story is not a growth story by adding new store footage, our story really is productivity within side the four walls. We’re not back to the sales that we’re at prior to the housing downturn. So as we look at opportunities with inside of our business, we still have an incremental flexibility in ours to capture that we had with inside of our company prior to the downturn. So we have ploughed some of that back we have got new business models and our services offerings, so a lot of opportunity with inside the four walls and that will remain our focus.

Greg Melich - ISI

Maybe you look to have even back a little bit given your long tenure at the company, there was a time when you’re sales were north of $400 when the company had 1000 stores not 2000 could you envision a world where those stores of levels of productivity are actually attainable again or is the am I just a dreamer?

Joe McFarland

We continue to see our sales per square foot continue to improve and we were at that 400 plus but we will be back at 400 plus aspirational you know certainly we would like to get there. I think we have got a lot of opportunity still from that pro-business from that downturn but again it won't be, we will not be if there is a square footage growth but through efficiencies with inside of our four walls.

Greg Melich - ISI

Great I want to make sure that I give audience a chance we have few minutes or so I will take up all the time so I have seen you have been patient.

Unidentified Analyst

You know in better times you have had the expo concept and which was a little higher end but I also had a much bigger percent of service and it's closed down I mean there had to be some good parts of expo and in today’s world with omni-channel and what you can put online and what you can also offer in terms of more service store, are there places in the country where you could bring back some of those expo concepts within your store or maybe across the country or do you even look at anything like that not in stores but within what you have now.

Joe McFarland

Sure we continue to look at that model expo just was not a business model but was working for us, so if I think about some of the appliance offerings that we have brought into our core U.S. stores, we have got several different models product mixes across the country. We do not have plans to explore an expo market or really any other formats. We want to put all of our energy, all of our focus into our core business. We do have a lot of those expo vendors available online and I think is our online business continues to grow as the retail world changes over the course of next two, three and five years. That expo foot print will not be something that we will go at.

Unidentified Analyst

Inside the store, store within a store.

Joe McFarland

Sure so we take and we evaluate what happens with our online business, so for instance some of the touch (inaudible) it's higher and touch faucets, higher end faucets and the higher end lighting and we’ve the ability to take some of those high end products and put them into our local stores where it makes sense. So we do continue to look at that, we have been making those additions and we will continue to do that as we move forward.

Unidentified Analyst

Could you talk about the sales productivity and some of the hardest hit markets that you cover like Las Vegas or Phoenix relative to where they were before the downturn and maybe compare it to the more stable market in your - Seattle or something like that that’s never gotten this hit this hard.

Joe McFarland

Sure so looking at those markets, take a Las Vegas, is it back to where it was, will it ever get back to where it was in the boom, probably not, some of that little over (ph) building but what you see in those markets is the confidence in the pro-customer, the confidence is finally starting to come back in the consumer as we were in the downturn, we saw things specifically product differences so think about some of the items that we’re selling in the downturn which was an opening price point water heater, round-box one year warranty and we’re seeing the business change from some of that opening price point product into the better product, into the 12 year water heater, I think you know it is going into a consumer zone versus an investor zone. So as we see those markets coming out they certainly are coming in you know their pace of growth is significantly better than the markets like the Phoenix that has not been hit as hard. So we’re very pleased with what we’re seeing, Phoenix, Las Vegas, Los Angeles and we have good degree of confidence that will continue.

Unidentified Analyst

On the fourth quarter call in terms of the outlook Frank had described the partial reasons for your more muted view was between personal income, extreme credit availability and average for consumers to take on credit and you are looking to figure out ways to credit availability up. Can you just say where that’s at and how’s that progressive and what you’re exactly doing about and what initiative entails and thanks.

Joe McFarland

So we still see a constrained consumer, not seeing the credit availability come back to that consumer yet, (inaudible) if you want to add some additional comments.

Unidentified Company Representative

So we’ve our private credit card and what we have found is that’s actually not been used all the way up that it can’t be but we’re beginning much more flexible so if we see someone especially if it's pro it's actually closer to its maximum we will actually go through and have a conversation with Citi and see if we can increase it. We also have something that’s called a project loan and that’s mainly for people who are doing kitchens and big projects that’s more like an installment loan so we have that, other than that it's slow going.

So essentially we’re much more malleable on the scores and things like that and we work on a one off basis with some of our customers in Citi. So the question was it a step change or tweak it's more of a tweak and we will just continue on it and obviously the better the credit scores and the better the economy becomes the more lose we think the lines will become.

Joe McFarland

And we do see things like our approval ratings for credit increases and new credit applications on the rise.

Greg Melich - ISI

I do want to follow-up on the technology side. It seemed like that’s a key driver of how you’re able to reallocate those store hours to help the customer. So sort of two questions what’s next now that your FIRST phone and where you’re on that?

Joe McFarland

We do have the FIRST phone we rolled out in 2012 the FIRST phone junior. We’re currently working on new version of that phone it's a mobile payment device to do a lot more things from a technology standpoint, so we will be launching our pro-app so for those of you who have not viewed our Home Depot consumer app we’re pretty pleased with the response we have received from the home depot consumer app but that has allowed our customers to be able to do. It's really our (inaudible) that you will see probably late Q2, it's really focused to that pro-customer.

It will allow them the ability to create list, to be able to send people to our stores with the things like e-receipt, so we continue to make a lot of improvements in technology. We’re really focused right now on that pro-customers, we see that pro-coming back so I take that we will be pleased that we will see in the pro-app.

Unidentified Company Representative

Yeah another point on the technology is it's not just what’s the associate has in the aisle but it's also what consumer can do so we spend a lot of time on buy online and return to stores so you can buy it online and you can return it to one of our 2000 stores in the U.S. You can buy online and pick up and store that’s for the skews that are already in the store so you can actually go online, check the inventory, so yeah I want that Sun Dialer, I want that Patio set and I want to pick it up in the store and so by the time you get to the store you actually you spend its past it's been fixed for you and now we’re also working on it's in pilot in maybe 500 stores, buy online and ship the store now. I would never, I don’t think I ever use something like that but what we found was that our consumers were already figuring out how to do it without us having the ability, meaning Jane Dough actually put the stores address on it, it's address to ship it to so come and receiving (inaudible) well who is Jane Dough and then there is a customer at the corner going yeah I’m Jane Dough yeah that’s for me and so. Our consumers obviously wanted it to so we have actually done the over putting through the buy online ship to store.

Joe McFarland

And so we continue to see our buy online pick up and store that business continues to grow week over week, I mean it is measurable week over week the growth that we see there and early read on the buy online ship to store has been very positive. So we’re pleased with what we’re seeing there and it really opens up that customer from the 40,000 items we have within the store and our goal is to have 600,000 to 700,000 items available so that customer can have that product delivered right to our store.

Unidentified Analyst

Can you just talk about your private label program and where you’re in terms of penetration today, where you think you can go maybe what categories you’re looking at and the different margin implications that might have for the business overall. Thanks.

Joe McFarland

Yeah so our private label program, we will continue to be focused on growing our private label brands, you see our launch of our HDX product with inside of our stores, one thing that has always been important to us as a company is to be a brand house to carry all the top brands that the pros want, that the consumers want, that the consumers connect with, we’re continue to be focused on being a brand ware house and our private label brands we will just be in addition to what we see.

So we don’t necessarily have a top target of penetration, it really depends on the customers reaction to the different products that we’re able to bring to the market.

Unidentified Company Representative

And we’re about 11% today penetration from our private label perspective and it's really when you look at products where the consumer really doesn’t care about a brand and so the great example would be like the plastic containers under (inaudible) so things like that you will see HD start to move into in.

Greg Melich - ISI

I think we’re a minute or two past our time and we promised everyone a 15 minute break so we’re going to cut it to 12 minutes. So everyone take a break. Joe I want to thank you, Diane, Dan the while Home Depot team for coming.

Joe McFarland

Thank you, see you in the store later.

Greg Melich - ISI

Thanks.



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