Management of Home Depot - Research Paper Example

?Home Depot Case Management I.Executive Summary The Home Depot (HD) leads all competitors in the industry. Although the outgoing CEO had greatly improved the process to arrive at higher sales and profitability, there is one important result required by the Board but not yet achieved. That is the improvement in the company’s share prices. Chart 3 shows the value of HD shares to be generally declining and having a hard time recovering, while that of the competitor’s stocks have been steadily rising. Initially, the problem looked like a mere customer service issue. Further research reveals there is a top management challenge to develop a good Strategic Plan, one that will retain the accomplishments of the previous CEO in terms of process and at the same time add missing ingredients. HD needs a Strategic Plan that will provide the finest customer services across all branches and that will convince the financial analysts in the stock market to recommend HD shares so as to push up the prices of its shares of stock. To win in that challenge without much experimentation, it is advisable for the new CEO to tap one expert financial adviser who is familiar with the stock market and has contacts with financial analysts, and another expert in the field of Retail Management and Customer Relations for the industry wherein HD belongs. With these two experts, and with good relationship and coordination with the Board, the right performance indicators can be agreed upon. Once people are all directed towards the accomplishment of action plans in the Strategic Plan, Home Depot value of shares will soar to the satisfaction of the Stakeholders. II. Background A.Problem Statement After the resignation of Home Depot’s CEO, Robert Nardelli, who had served the organization from the years 2000-2006, the new CEO, Frank Blake, has to decide what to do in order to satisfy Home Depot Stakeholders who wanted the value of the corporation to increase. Re-stated in a question, what should be the strategies of the company to achieve desired results? B.Symptoms Although the profit margins and sales increased during the term of office of CEO Nardelli, and the number of store outlets grew yearly, the Stakeholders were not impressed and were in fact dissatisfied. The cumulative shareholders’ returns in 5 years was reported in the case to be at negative (-13%). This obliged them to tie up the income of the CEO to the share prices of Home Depot which have been down. In terms of financial performance, more details are in the Appendix Figure 1B. In one article by Simpson, Stephen D. (2006), the author noticed how sales growth of Lowe was much faster than that of Home Depot. He said: “All that said, it is clearly true that Lowe’s is the pluckier and faster growing of the two concepts. Sales in the 4th quarter climbed over 26%...and earnings per share rose nearly 36%. Certainly those numbers outstrip what Home Depot managed to accomplish.” Stephen furthermore added that it was generally known that Lowe’s had “better customer service”. Compared to Lowe in 2006, Home Depot was growing in sales by only 11.14%. C.Critical Factors The experiences of both CEOs Robert Nardelli and Frank Blake were not in the Retailing or Marketing Industry. Both came from GE or General Electric. Nardelli came from the Power Systems Division while Blake was a lawyer. Thus, the former CEO was good at cost cutting and improvements in the process, but weak in customer handling and probably even marketing. The new CEO, on the other hand, was faced by circumstances he did not have expertise on. Shareholders were dissatisfied by the relatively poorer performance of the share prices of Home Depot in the stock market. The graph showed HD shares declining in value. Checking on the financial side, it can be seen that Nardelli actually did a fine job of providing the profitability, growth in sales, and liquidity. Further research revealed the presence of an aggressive competitor, Lowe, which was penetrating the market of HD since it opted to expand by borrowing substantially. As early as year 2000, Lowe’s Long-term Debt-to-Equity was already 33.3% while that of Home Depot was only at 6.9% in 2001. By the end of 2003, its growth in net earnings was at 27.6%; earnings per share was $ 2.34 or a growth of 26.5%; and dividends per share was $ 0.11 or a growth of 29.4%, according to the Lowe’s Annual Report 2003 online. D.Current State By 2007, the key financial indicators affecting decisions of buyers and sellers in the stock market, namely EPS, Dividends, Liquidity, and Growth Rates should be compared. Figure 1C shows the details. And the customer service is known to have deteriorated during the time of the previous CEO. III. Analysis A.Operational Models The positive effects of Six Sigma included the development of a better process that could streamline cost and improve earnings. Implementing technology like the touch screen for faster response to customer queries likewise became advantages. However the decline in customer orientation of Retail Sales Personnel brought about poor customer services. What seemed to be neglected was also the concern for the price of shares of stocks of Home Depot in the stock market. At a time when Lowe’s share prices continued to increase, the share prices of Home Depot were not increasing. B.Course Contents In financial reports of HD, there was no monitoring of P/E Ratio. Buyers look at the P/E ratio to determine the probability of a high price increase and potential jackpot when it happens. Outside Research showed that one reason why Lowe’s had been the preferred company was because of its aggressive activities that led to expansions and higher net income. And the other reason is HD’s loss of service orientation for customers. To be more thorough, there should always be an awareness of the key comparative financial indicators plus good advices from trading analysts. This will allow Home Depot to be guided accurately towards improvements in the prices of the HD shares. In Appendix Figure 3, the usual financial indicators watched are listed. The Price/Earnings Ratio is crucial for recommendations from market analysts to buyers and sellers of stocks. Since the price of HD shares is the main concern of Stakeholders, there should be great importance given to monitoring the performance of HD using the multiple financial indicators as guide. C.Alternative Options The new CEO can revert back to the old system of focusing on customer services. Or he can move forward and improve the process at the same time that there should be less rigid implementation of the Six Sigma ways of improving profitability. One way to improve is by hiring an expert in marketing and retailing so that the customer experience in favour of customers can quickly become well known to all customers of Home Depot. His retail expert backup can add credibility to Home Depot leadership when people are made aware of the news of somebody with such an expertise in the field of retailing. To improve employee morale, Frank Blake should survey for the preference of employees concerning the hiring of employees who will not be treated as contractual. Satisfying the employees will boost their morale to help get back the desired customer positive experiences with the employees’ high morale. D.Implications of Options There will have to be a strategy wherein top management focus will define (1) performance indicators approved by the Board of Directors, (2) how to provide the best customer services in all outlets, (3) how to improve the morale of Retail Sales Managers, and (4) the desirable financial image of the company so that shares of stock of HD will be in demand. Concentrating too much on Six Sigma process implementation would have to be reduced to give way to the desired results agreed upon with the Stakeholders, employees, and experts in financial and marketing aspects. E.Trade-Off The new CEO who is a lawyer by profession would have to maintain an open mind to accept whatever goals are generated in coordination with the Stakeholders. His skills in research would have to discover reliable talents in the field of financial analysis, retail store management, and good business planners. It would probably add more cost of manpower with specialized skills. In return, the chances of clarifying and achieving the goals will be much higher. IV. Recommendations CEO Frank Blake must take control of the organization starting with the formulation of a strategic plan. Define the goals and secure approval of priorities from the Board of Directors. In order to arrive at workable and accurate action plans, even while he is a lawyer, he should immediately find and, if necessary, hire a couple of experts who can (a) guide in the delivery of the operational requirements in terms of meeting the targets to achieve excellent financial indicators that will convince investors to demand for the shares of stocks of Home Depot, and (b) provide the needed rapport for the development of strong customer services in all outlets. There is no need to dramatically change the process from that developed by the former CEO since most of the financial indicators look very good. It is just a matter of being more competitive with Lowe’s Inc. and more acceptable to the business community so as to gain their confidence. He should also get feedback from the Sales Force about the marketing strategies of Lowe. V. Conclusions In general, the outgoing CEO did a fine job with the sales and profits of the organization. The needed improvements should be towards becoming better in the competitive world of Stock Markets. That is by reaching the best financial indicators needed to improve the price of shares of Home Depot. Details of these indicators are shown in Figure 4. The new CEO should arrive at a Strategic Plan fast enough to present changes acceptable to Stakeholders and present employees. To arrive at the best possible workable plan, a couple of experts have to be given the assignments to define the highly recommended financial indicators and how the right goals can be achieved, and to ensure achievement of the finest customer services in the industry. And good relationship and coordination with the Board of Directors should pave the way to agreements with the right Performance Indicators as well as with the Strategic Plan. Footnotes: 1Robert Nardelli became CEO of Home Depot from December 2000 to December 2006. He is therefore accountable for the financial performance of 2001 to 2006. 2Annual Financial Reports of The Home Depot retrieved online from http://media.corporate-ir.net/media_files/irol/63/63646/complete_annualrpt2001.pdf References Simpson, Stephen D. (2006). Lowe’s Vs. Home Depot. StockTwits February6,2006, CNN Money Partner. Retrieved from http://www.crossingwallstreet.com/archives/2006/02/lowes-vs-home-depot.html . Lowe’s Annual Report 2003. Retrieved from http://images.lowes.com/animate/Lowes2003AnnualReport.pdf . Lowe’s Historic Price Lookup 2007. Retrieved http://investor.shareholder.com/lowes/stocklookup.cfm?historic_Month=1&historic_Day=12&historic_Year=2007 Appendices Figure 1A. (Source: The Home Depot 10-year Summary of Financial & Operating Results. Retrieved from http://media.corporate-ir.net/media_files/irol/63/63646/annual2006.pdf . August 13, 2011) Figure 1A. continuation (Source: The Home Depot 10-year Summary of Financial & Operating Results. Retrieved from http://media.corporate-ir.net/media_files/irol/63/63646/annual2006.pdf . August 13, 2011) Figure 1A continuation (Source: The Home Depot 10-year Summary of Financial & Operating Results. Retrieved from http://media.corporate-ir.net/media_files/irol/63/63646/annual2006.pdf . August 13, 2011) Figure 1B. From 2001 to 2006, the financial performance in line with these showed the following: 20011 2002 2003 2004 2005 2006 Gross Margin % of sales 30.2% 31.1% 31.8% 33.4% 33.5% 32.6% Sales Value (in $ millions) 53,553 58,247 64,816 73,094 81,511 90,837 Net Earnings (in $ millions) 3.004 3,664 4,304 5,001 5,838 5,761 No. of Stores 1,091 1,532 1,707 1,890 2,042 2,147 Average Sales per store 49.09 38.02 37.97 38.67 39.92 42.31 (in $ millions) Ave. Net Earnings % per Sale 5.6% 6.2% 6.6% 6.8% 7.16% 6.34% Diluted Earnings Per Share (EPS)2 $ 1.29 1.56 1.88 2.26 2.72 2.79 Cash Dividend Per Share 0.17 0.21 0.26 0.325 0.40 0.675 Current Ratio 1.59 : 1 1.48 : 1 1.40 : 1 1.37 : 1 1.20 : 1 1.39 : 1 Current Liabilities (in $ millions) 6,501 8,035 9.554 10.529 12,706 12,931 Long-term Debt 1,250 1,3,21 856 2,158 2,672 11,643 Stockholder’s Equity (in $ millions) 18,082 19,802 22,407 24,158 26,909 25,030 ROI 18.3% 18.8% 20.4% 21.5% 22.4% 20.5% 2001 2002 2003 2004 2005 2006 Debt-to-Equity 42.86% 47.25% 46.45% 52.52% 57.15% 98.18% Sales Growth 11.49 11.14% Figure 1C. Latest Financial Analysis Status Buyers Are Concerned aBout Home Depot Lowe’s Growth/ (Decline) Earnings/Dollar In % HD Lowe’s HD Lowe EPS, 2006 $ 2.76 $ 1.99 2.5% 15% $ 0.06 $ 0.06 Price per share 39.25 31.15 Cash Dividends 0.90 $ 0.18 Liquidity (Current Ratio) 1.39 1.29 Liquidity (Debt-to-Equity %) 108.8 76.58% Price Earning Ratio 14.22 15.65 Figure 2. (Source: The Home Depot Annual Report 2006, p. 3. Retrieved from http://media.corporate-ir.net/media_files/irol/63/63646/annual2006.pdf) Figure 3. Indicators Watched By Analysts For The Home Improvement Industry (Source: Yahoo Finance on The Home Depot Inc.. Retrieved http://finance.yahoo.com/q/co?s=HD+Competitors ) Chart 1 (Source: The Home Depot Annual Reports 2006, p.3. Retrieved http://media.corporate-ir.net/media_files/irol/63/63646/annual2006.pdf) Chart 2. Lowe’s Stock Market Prices Chart 3. Read More