Home Depot
HD Annual Meeting

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By Infowonk
June 3, 2002

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Notes from the Annual Meeting (5-29-02) (no guarantees that everything here is 100% accurate):
* Of 2.35 B shares entitled to vote, 87.3% were represented at meeting
* All director candidates were approved.
* Proposals to adopt accounting firm, eliminate Article Eighth, and re-approve stock incentive plan were approved (Yes votes 96%, 97%, and 88%, respectively)
* Stockholder proposal to adopt a human rights-related code of conduct was defeated (92% voting No).

Evelyn Davis, perennial corporate gadfly, stood up and interrupted the voting results announcements to ask if any other investment bankers besides Kenneth Langone, HD Director and CEO of Invemed Associates, an investment banking and brokerage firm, had been given an opportunity to compete for HD's business. Being extremely courteous to the out-of-order question, Nardelli told her that selection of investment banking firms are done at arm's length, and that other firms had been given equal opportunity to compete for the business. [I am unaware of the extent of Mr. Langone's firm's business relationship with HD. The previous verbal exchange is how I understood it. No claims to its accuracy.]

Highlights of the previous year (or in some instances, 15 months) by Nardelli (most of this has already been disseminated through news releases or is available in annual reports):
* YOY Sales went from $46-$54 B
* Earnings for FY01 were $3B (+18%)
* HD held $2.5 B cash & ST investments at end of FY01 ($5.2 B at end of 1Q02)
* Dividend was increased by 25% last year
* HD moved ahead of Kroger to the number 2 position behind Wal-Mart, the largest retailer
* Fortune called HD the #1 specialty retailer, the #6 most admired company in America, and the 18th largest company in America
* EPS increased from $1.10 to $1.29 YOY
* 1333 stores at the end of FY01
* Same stores sales ended an eight consecutive quarter slide in growth rate (not positive about this one)
* 1Q02 EPS increased 33% over 1Q01
* 1Q02 Sales ($14.3 B) increased 17% over 1Q01
* Return on invested capital went from 18% to 19.2% over the last 15 months
* Record average ticket of $50.40 per transaction in 1Q02
* Gross margins increased from 30.00 to 30.53% from 1Q01 to 1Q02.
* Inventory turns for the same periods went from 5.1 to 5.6

The DesignPlace concept was implemented in 420 stores by YE 01. This program is one way HD is trying to become a more "female-friendly store," said Nardelli. HD intends to have 57% penetration of DesignPlace by YE02 (approx. 870 stores).

Nardelli stated that the average child's room is redesigned 3 times during their time growing up. This statistic is behind the move to team up with Disney to use Disney trademarked characters and other items to decorate youngsters' rooms.

A new "fashion forward" lamp assortment is being introduced to HD stores to help make stores become the destination for home lighting accessories (and become more "female-friendly").

The expanded major appliance offering has been put in 133 stores as of the end of 1Q02. The 1500-2000 square-foot section is expected to have 26% penetration by YE02 (approx. 400 stores).

The PRO initiative has been implemented in 600 stores over the last 15 months (769 stores as of 1Q02). This is to help HD capture as much as possible of the $276 B professional home improvement business. Nardelli expects to have 62% penetration (approx. 950 stores) by YE 02. The avg. professional spends $3 for every $1 that the avg. DIYer spends (in HD stores, I think).

"And speaking of professionals," Nardelli introduced a short video of Tony Stewart's NASCAR exploits over the last year (HD is the primary sponsor of Stewart, for those not aware of that). He then acknowledged and introduced Stewart and Joe Gibbs, racing team owner, who were sitting in the front of the room.

As part of its effort to "put more arrows in our quiver," Nardelli discussed a number of current initiatives to spur growth.

HD is broadening its store format. HD now has three Home Depot store sizes: 120k, 95k, and 65k square feet. I gathered that the new Brooklyn store, the first "Urban Home Depot," has the 65K format. HD wants to tailor each store to the neighborhood. With the Brooklyn store, Nardelli feels they have been successful in this goal. He stated that 1/3 of the first day's customers there walked to the store. He feels the store is a good fit for the neighborhood. The next Urban Depot will come to Chicago's Lincoln Park area (this year?).

HD plans to have five Home Depot Supply Stores in place by year end to serve primarily the professional customer.

HD will open a total of three landscape supply stores in the Atlanta area this year.

Home Depot will use a "three bucket" strategy for growth. The "buckets" and some examples are:

* Enhance the core - improve performance of the traditional stores through SPI and PRO initiatives, DesignPlace.

* Extend - New income through at-home services, additional tool rental centers, and new store formats

* Expand - Growth internationally as in new stores in Mexico (a $12.5 B market); and Expo Stores[not in Mexico]. HD has gone from zero stores in Mexico to being the second largest building supply retailer in Mexico in just a few months.

Nardelli then reflected on the company's values and how the company has a long history of giving back. The biggest item discussed was how the company assisted with materials and assistance after the horrific events of 9/11. Other examples of the company's generosity include assistance to Kaboom [I'm in the dark on this one], Habitat for Humanity, the Welfare to Work Program, as well as the donation of millions of employees' "spare" hours to help various charities in their respective

Nardelli then mentioned OJOP, the Olympic Job Opportunity Program that Home Depot helps sponsor. Seven HD employees won eight medals at the Salt Lake City Winter Olympics and Paralympics. Nardelli quipped that if HD had been a country, it would have been 12th in the medal count. The seven aforementioned Olympians were then introduced and given a standing ovation of the shareholders. [In case you were interested, the athletes were Rusty Smith, short track speed skating; Derek Parra, speed skating; Monte Meier, Paralympic skiing; Dan Steele, bobsled; Tristan Gale, skeleton; Danielle Goyette, ice hockey; and Garrett Hines, bobsled.] HD sponsored 140 potential Olympians in 2002 and plans to sponsor 200 athletes in 2004.

The Q and A session followed. Two comments dealt with experiences shareholders had had with poor service at HD stores. One questioner expressed to Nardelli how it is difficult to apply concepts like 6-Sigma and "blackbelt" in the retail environment due to the human factors involved in retail as opposed to a manufacturing environment. A couple of shareholders were very concerned about the stock price, and one asked if he should sell his shares. Nardelli addressed these by apologizing for the poor experiences in the stores and stated how he himself did not totally understand the share price drop. He said that he was troubled by the market performance of the stock which he felt was due to "tradeout to the competitor" [I took that to mean institutions dumping HD stock and buying Lowes]. He was puzzled why this would occur with HD having $220 M in earnings in the most recent quarter vs. 120 M for LOW (he never mentioned them by name), higher dollars of sales per square foot than LOW, and a debt/equity ratio of 6 vs. 33 for LOW.

I remarked that I had seen in the annual report and heard on the latest conference call that days payable outstanding had increased from 23 days to 51 days over the last 15 months. I asked Nardelli if the company had had any resistance from its suppliers in regard to the longer payment terms, and if he expected DPOs to remain about the same or be higher or lower. He stated that HD had gotten together with their suppliers awhile back to discuss the subject of longer payment terms. HD made the case that the company paid quicker than its competitors. The industry standard was 60 days, and HD was going to begin paying terms more in line with the industry. After the "initial shock", suppliers apparently accepted the new payment terms without much pushback.

Bernie Marcus, co-founder of HD, stepping down from the board at the mandatory retirement age of 72, was honored for his legacy and his years of service, and received a standing ovation. He spoke for a few minutes, and I will present some of his comments in a future post.

Nardelli finished off the meeting by presenting Hollywood producer Norman Lear, of "All in the Family", "Maude," "The Jeffersons," and "Good Times" fame. Lear bought one of the 25 or so signed copies of the Declaration of Independence, and Home Depot is sponsoring the tour of the document across America. The document, "unveiled" during the meeting, was available for viewing after the meeting, prior to it going on display at the Jimmy Carter Library for its first tour stop.


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