Fool on the Street: Talking Shop at Home Depot

Here at the Fool, we know you've got a life. Between working while the sun shines, and catching Zs when it doesn't, you may find it hard to keep up to speed on Wall Street events -- corporate "investor conferences," for instance.

These meetings ostensibly benefit investors, but the companies behind them rarely transcribe their proceedings and file them with the SEC. As a result, unless you can attend in person, you're often left out in the cold. That's where our "Fool on the Street" series comes in. We listen to the conferences so you don't have to.

Without further ado ...
Today we'll recap the news from Home Depot's (NYSE: HD  ) June 26 presentation at the Wachovia Securities CEO Summit. Belying the conference's title, Home Depot sent Senior VP, Supply Chain, Mark Holifield, to speak on its behalf.

Holifield opened his talk by briefly running down the "five key operating priorities" of new CEO Frank Blake (who was inexplicably absent from the "CEO Summit"):

  • Customer service
  • Generating "product excitement"
  • Improving the shopping environment
  • "Own the Pro" -- improving Home Depot's relationship with professional contractors, and presumably stealing more market share in this customer niche from rivals like Lowe's (NYSE: LOW  )
  • Product availability

Citing his job title in explanation, Holifield quickly homed in on this last priority as the theme of his talk. I'll break it down for you in three easy segments.

Sorry, we're fresh out of that
Holifield identified inventory management as key to improving product availability -- making sure the stuff people want to buy is on the shelves at the moment they want to buy it. Admitting that this is a weak point at Home Depot right now, he advised that the firm is taking several pages from Wal-Mart's (NYSE: WMT  ) book. For one, Home Depot is implementing "velocity-based distribution," which appears to refer to just increasing inventory turnover. For another, it is testing out software aimed at improving "supply chain analytics," including "demand forecasting" products from Logility (Nasdaq: LGTY  ) and SAP (NYSE: SAP  ) implementation software.

Holifield did not paint a picture of a quick fix in the works, however. Rather, he advised that from "2008 through 2010, we will continue the core retail implementation." So it may take some time before we see any striking improvements in inventory turns.

Fortunately, we may not have to wait until 2010 for evidence of those improvements. Perhaps the most interesting part of Holifield's talk was his description of how the Depot aims to roll out the new software in Canada. In each case, Home Depot is using the nation up north (which hosts just 7% of its total complement of stores) as its Petri dish, to see how the new initiatives play out. If successful, they'll later migrate south to the other 93%.

Our challenge as investors will be to dig out data on how the Canadian operations are faring. Reviewing the last few quarterly earnings releases, I see that management never specifically addresses what's going on up there. For that reason, we'll be relying on on-the-ground Fools to report any improvements they see (post your observations here if you're an Inside Value member, or here if you're not). We'll also be paying special attention to any Canadian-oriented questions posed by analysts on the firm's conference calls.

Back up the truck
By listening in and discovering that Canada holds the key to Home Depot's improved inventory turns, we've already got a return on our investment. But that's not all we got. Holifield also gave us some insight into how he hopes to improve margins at the retailer -- by centralizing its supply chain.

Holifield observed that at present, just 40% of the products on the shelves at your local Home Depot arrived there from a central location. He aims to get that number up to 80%. Why? Simply put, because centralized distribution of goods in bulk is cheaper than the alternative -- shipping just the goods needed by an individual store, from the supplier who makes them. Citing his experience at his previous job -- running the supply chain at Office Depot (NYSE: ODP  ) -- Holifield explained that when goods are shipped in bulk on fully loaded trucks, shipping costs average $10 per "hundredweight" (100 pounds of goods). When shipped "LTL" (another industry term, meaning in "less-than-truckload" amounts), the cost rises to $17 per hundredweight. In the worst-case scenario, when goods come by parcel, the cost rises to $30 per hundredweight -- three times the cost of centralized distribution. So, clearly, a doubling in centralized shipments should improve Home Depot's operating margins.

Holifield observed that the same is true to an extent for shipments from Home Depot to its customers via GE Depot Direct (a service for selling GE (NYSE: GE  ) appliances to homeowners) or Home Depot Direct (where goods are delivered to professional contractors). In each case, Holifield sees inefficiencies that he'd like to wring out of the system.

Buy the numbers
One final point before we close out today's recap: Holifield advised investors to look for three key signs to determine whether the changes he is making to Home Depot's supply chain are having the desired effect. We want to see:

  • higher margins
  • sales growth
  • faster inventory turns

And that's all, folks.

Wal-Mart and Home Depot are both selections of the Motley Fool Inside Value newsletter. Want to find out which inexpensive moneymaking machines subscribers are snapping up today? Click here to be our guest for the next 30 days.

Fool contributor Rich Smith has no position in any of the companies mentioned in this article. If he did, The Motley Fool would require him to tell you so. We're sticklers about things like that.


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