How To Improve The Home Depot

Transcription

1 Improving the Customer Experience at Home Depot Rev During 1990 s, the Home Depot was well renowned for its orange-blooded entrepreneurial culture and outstanding customer service. From the beginning, the retailer took a long-term approach by training its associates to form enduring customer relationships rather than push for incremental sales gains. As a result, the company grew very quickly becoming the fastest retailer in history to reach sales milestones of $30 billion, $40 billion, $50 billion, $60 billion and $70 billion in revenues i. Despite this remarkable success, Marcus and Blank, the founders of the Home Depot, stepped down as leaders stating that continued growth required new leadership with fresh and innovative business approaches. Thus, in 2001, Robert Nardelli was named Chief Executive Office of the Home Depot. Nardelli introduced many new initiatives to the company such as, centralized buying, company-wide analytics and improved information systems, which were essential for the company to remain competitive. Many of his other changes, however, led to significant dissatisfaction, low morale, high turnover, reduced productivity, and general discontent among the associates that seriously derailed the company from the customer-centric approach that made the Home Depot such a success story during the Marcus and Blank era. The result was the most dramatic decrease in customer satisfaction in retailing history. In 2001, the Home Depot and Lowe s both had customer satisfaction scores of 74 on the American Customer Satisfaction Index (ACSI). By 2005 however, customer satisfaction at the Home Depot fell to 67, becoming the worst performing retailer on the American Customer Satisfaction Index (ACSI) that year. ii As Claus Fornell aptly stated: Home Depot had devalued its most critical asset: the health of customer relationships. iii In turn, this drastic decline in satisfaction led to a significant deterioration in financial performance for the company, as well. By the fourth quarter of 2006, earnings for the company decreased by 28 percent and comparable store sales declined by 6.6 percent. This represented the first period of financial decline in the history of the Home Depot. iv By the end of that year, Frank Blake replaced Nardelli as the Chief Executive Office of the Home Depot. Frank Blake, heralded by many as the calmer-in-chief, represented a much-needed departure from the command-and-control style of Nardelli. v Putting the Home Depot on the right course, however, was a huge under-taking even for the most experienced of leaders. vi Blake began by investing $2 billion in five key areas: 1) associate engagement, 2) product excitement, 3) product availability, 4) shopping environment and 5) professional or trade customer ( own the pro ). vii Although it took some time, under Blake s leadership, the company finally experienced notable improvement in many important areas. For example, customer satisfaction increased by 11 points on the American Customer Satisfaction Index (ACSI) between 2007 and 2011 and voluntary associate attrition dropped by 20 percent by the end of viii This case was prepared by Dr. Ronald L. Hess, Jr., Associate Professor of Business at the Mason School of Business as a basis for class discussion. It is not intended to illustrate either effective or ineffective management.

2 In addition, the company reported better overall retail sales and comparable store sales growth in 2010 and In 2010, overall sales and comparable store sales increased by 2.8 and 2.9 percent, respectively (See Table A below). ix In the second quarter of 2011, the Home Depot reported 4.2 percent increase in total sales and 4.3 percent growth in comparable store sales. x See Exhibit 1 for annual financial statements for the Home Depot for Table A: Total Sales and Same-Store Sales Percentages Q2* Q Q2 Total Sales -2.1% -7.2% -7.2% 2.8% -0.2% 4.2% Comparable Store Sales -6.7% -8.7% -6.6% 2.9% -0.6% 4.3% * Source: Home Depot Annual Reports, homedepot.com The story, however, was very different at Lowe s. In Q2 2011, Lowe s reported overall sales growth of 1.3 percent and comparable store sales were flat. xi The company lowered its revenue forecast for the remainder of the year and announced a significant restructuring of its store and merchandising organizations. According to leadership of the company, the goal of the restructuring was to make Lowe s faster and more nimble. xii To make matters worse, Lowe s stock price dropped 18 percent during As Blake reflected on the recent achievements of the Home Depot, he remained notably cautious. Although he was fully aware of the considerable progress that had been made by the company, he believed that there was still much to improve. Customer satisfaction scores for the Home Depot still trailed Lowe s by 1 point according to the 2011 American Customer Satisfaction Index (See Exhibit 2). Most unsettling, the 2011 J.D. Power and Associates U.S. Home Improvement Retailer Satisfaction Study revealed that the Home Depot (737) ranked sixth in customer satisfaction behind Ace Hardware (786), Lowe s (771), Menard s (765), Sears (754) and True Value (742). Only Do It Best/Do It Center (708) ranked below the Home Depot in the study. xiii Blake wondered how the company could leverage its initial success to further improve the customer shopping experience at the Home Depot. The next several years would be critical for the company, as incremental improvements in the shopping experience required more consistency with execution across stores and stronger dedication from store-level managers. Home Depot: The Worst in Customer Satisfaction The American Customer Satisfaction Index (ACSI) publishes satisfaction scores annually based on a 100-point index. Retailers with ACSI scores that exceed 80 point were typically considered best-in-class. Historic data from the American Customer Satisfaction Index (ACSI) showed that in 2001, Home Depot and Lowes had equivalent customer satisfaction scores of 74 (see Exhibit 2). In only two short years, the Home Depot s ACSI dropped by two points to 72 and Lowes Page 2

3 increased by the same amount, reaching 76. xiv These changes produced a satisfaction gap of 4 points between the two retailers. A gap of 4 points was evidence enough that the customer experience at Home Depot was substandard and needed serious retooling. Unfortunately, while the management team at the Home Depot was fervently developing numerous quantitative metrics to control expenses and improve profitability, they ignored this sizeable drop in satisfaction, and the condition deteriorated further. By 2005, the ACSI for Home Depot dropped by an additional 5 points, falling to 67, a score that also made history as being the worst satisfaction score of any retailer that year. Meanwhile, customer satisfaction at Lowe s had increased by 2 points reaching 78 in xv This created an 11-point satisfaction gap between these retailers a gap that was unmistakable to customers (See Exhibit 2). As a result, data collected by Kanter Retail indicated that customer preference for Home Depot fell to its lowest level at 34% compared to 47% for Lowe s. xvi By 2006, Nardelli and his management team were aware that customer satisfaction problems existed and made some changes to stores and policies to improve the scores. The company invested $350 million in additional frontline associates, new radio-equipped call boxes for customer self-service assistance, and an incentive program rewarding associates for providing excellent customer service. xvii These programs were effective and customer satisfaction scores improved by 3 points to 70 by the end of The improvement was only temporary, however, as the ACSI for Home Depot decreased by 2 points to 68 in xviii New Leadership Style and Orange-Blooded Cultural Healing Blake took over as the unlikely successor to Nardelli in early With a legal education, little retailing background, and strong ties to Nardelli, Frank Blake was not what most people expected from the new leader of the Home Depot. However, Blake possessed a very different management style than Nardelli and was very willing to listen to new ideas. What makes Frank Blake adept is that he brought sensibility to Home Depot. xix According to the leadership consultant Jeremy Garlington, Lawyers are classically trained in conflict and how to navigate deep-rooted issues that have human resources and financial implications. xx Blake began his tenure as CEO by easing existing tensions between headquarters and store associates. He read to all of the associates on a live television broadcast from the company biography, Built from Scratch, written by founders Bernie Marcus and Arthur Blank. xxi The goal was to restore some of the unique orange-blooded culture that made the Home Depot such a success. Blake also regularly consulted with Marcus and Blank to help formulate a customer-centric strategy and get the company back to its original orange-blooded culture. Blake frequently walked the Home Depot stores with Marcus and Blank and had them present annually at the Home Depot rallies to reinvigorate the store managers. xxii Blake also found it important to reintroduce several of the symbols and ethos that were once very important at Home Depot. For example, Blake made it quite clear early in his tenure that Page 3

4 he was the least important employee at Home Depot because he doesn t work with customers every day. A symbol of this gesture was to reinstate the Home Depot s Inverted Pyramid (see Exhibit 3). The Inverted Pyramid presented the front-line associates on the top (rather than on bottom) and the Chief Executive Officer and headquarters on the bottom (rather than on top). The objective of the Inverted Pyramid was to demonstrate that management s central role was to support store associates who directly served customers. Blake also practiced a non-hierarchical management style that cultivated a strong team spirit. There was a symbol that Bernie and Arthur had: That we re all associates and we re all available. We re all in this boat together. xxiii In terms of leadership style, Blake possessed great humility but could be forthright and demonstrate considerable conviction in his beliefs about the direction for the company. According to one devoted Home Depot associate, Frank is very candid. If he thinks something (stinks), he will tell you. If he believes in something, he will explain why we are doing it. He has conviction and will stand up for what he believes, but also know what it means to listen. xxiv Blake s Sincere Apology to Customers MSN Money published a column by Scott Burns who wrote a malicious diatribe about the dismal customer service that he experienced at the Home Depot. This particular column grew considerable momentum and attracted thousands of former customers to post messages on the MSN boards sharing their personal stories of poor service from the Home Depot. More than 10,000 customers also sent messages directly to MSN editors to report their horror stories about the Home Depot. In response, Frank Blake posted his own heartfelt response, requesting customer forgiveness, promising to improve the shopping experience, and pleading with them to give the Home Depot a second chance. Blake was especially remorseful towards the very loyal Home Depot customers: I recognize that many of you were loyal and dedicated shoppers of The Home Depot... and we let you down. That's unacceptable. Customers are our company's lifeblood -- and the sole reason we have been able to build such a successful company is because of your support. The only way we're going to continue to be successful is by regaining your trust and confidence.. and we will do that. (See Exhibit 4 for Blake s letter) xxv Blake also explained that efforts were underway at the Home Depot to improve the appearance of the stores, create a fun and convenient store atmosphere, and encourage associates to acknowledge customers and assist them in solving their home improvement issues. Although this period represented one of the lowest points in Home Depot s illustrious history, it also allowed Blake to make a bold statement that new customer and associate initiatives had been introduced and significant improvements were on the way. Big Changes at Home Depot Page 4

5 Blake was praised for producing a very strong management team at the Home Depot. One of the key members of this team was Marvin Ellison who was promoted to executive vicepresident of U.S. stores. Ellison previously held a regional management position at Home Depot as the head of the northern division where he had established a reputation for running some of the best stores in the company. As Blake commented, you could go blindfolded into two stores and know when you were in Marvin s stores. xxvi Ellison felt that store managers received far too many conflicting messages from headquarters. We were focusing on too many things reporting and other nonsensical metrics as opposed to making the customer the priority. That s not to say that we didn t think the customer was important, but customer service was one of many things on an associate s plate. Now it is clear what is most important, and we have defined the associate s role in taking care of the customer first. xxvii As the head of the northern division, he gave store managers three well-focused goals - clean warehouses, well-stocked shelves, and top customer service. xxviii As head of U.S. stores at the Home Depot, he remained committed to simplifying the roles and responsibilities of the store managers. Ellison established four steps to improve customer service: 1) simplify the store environment, 2) create clear service expectations, 3) leverage technology, and 4) celebrate success. During a 2010 Investor and Analyst Conference, Ellison stated that customer service was the first leg of Home Depot s strategic stool and must be a point of differentiation for the company. xxix Orange-Blooded Culture Reprise "Bernie and I founded the Home Depot with a special vision -- to create a company that would keep alive the values that were important to us. Values like respect among all people, excellent customer service and giving back to communities and society" xxx Blake also believed strongly in the importance of rekindling many of the values that made the Home Depot such an inclusive and engaging working environment. The company s website stated that, The Home Depot s values guide the beliefs and actions of all associates on a daily basis. Our values are the fabric of the Company s unique culture and are central to our success. In fact, they are our competitive advantage in the marketplace. Associate pride and our orangeblooded entrepreneurial spirit are distinctive hallmarks of our culture. The company website lists the following core values: 1. Taking care of our people: The key to our success is treating people well. We do this by encouraging associates to speak up and take risks, by recognizing and rewarding good performance and by leading and developing people so they may grow. Page 5

6 2. Giving back to our communities: An important part of the fabric of The Home Depot is giving our time, talents, energy and resources to worthwhile causes in our communities and society. 3. Doing the right thing: We exercise good judgment by "doing the right thing" instead of just "doing things right." We strive to understand the impact of our decisions, and we accept responsibility for our actions. 4. Excellent customer service: Along with our quality products, service, price and selection, we must go the extra mile to give customers knowledgeable advice about merchandise and to help them use those products to their maximum benefit. 5. Creating shareholder value: The investors who provide the capital necessary to allow our company to grow need and expect a return on their investment. We are committed to providing it. 6. Building strong relationships: Strong relationships are built on trust, honesty and integrity. We listen and respond to the needs of customers, associates, communities and vendors, treating them as partners. 7. Entrepreneurial spirit: The Home Depot associates are encouraged to initiate creative and innovative ways of serving our customers and improving the business and to spread best practices throughout the company. 8. Respect for all people: In order to remain successful, our associates must work in an environment of mutual respect, free of discrimination and harassment where each associate is regarded as a part of The Home Depot team. xxxi Associate Selection and Development Significant changes in associate training were also implemented at the Home Depot. All salaried, hourly and part-time associates were required to complete the same training program called Customer F.I.R.S.T. Customer F.I.R.S.T. is an acronym for the five steps (Find, Inquire, Respect, Solve, Thank) required by associates to satisfy customers. xxxii This training utilizes lecture and written materials, role-playing exercises, and in-store associate assessments. This very unique training program was taught entirely by store managers, with follow-up training performed by assistant managers and department supervisors. A central goal of the Customer F.I.R.S.T. training program was to set clear expectations for the appropriate roles and behaviors for associates when on the sales floor. The company believed that generalized slogans such as put customers first failed to give associates enough guidance about appropriately serving customers. According to Ellison, providing store associates with more specific expectations about their behaviors was working: you can watch an associate working with customers, and it s immediately clear whether they re following our customer service plan or not. xxxiii An additional program that was recently introduced at the Home Depot involved helping associates better understand how to perform common customer projects. Project experts were identified throughout the company who trained fellow associates about projects within a Page 6

7 specific department. This training often required associates to actually complete a home improvement project on their own such as, tiling a bathroom, refinishing furniture, or building a fence. xxxiv The goal was to help associates become more comfortable assisting customers with projects and solving their project-related problems. Workplace and Job Design Management also made significant changes to simplify the associates roles in the stores. Ellison is trying to keep things simple. He has slashed the number of reports, tasks, and messages handed down from the corporate office. Store managers who were flooded with some 200 company s and reports on any given Monday now typically get one: The rest are available online. And he severely restricted messages from headquarters to the stores during the rest of the week. xxxv As Ellison indicated, reports don t buy hardware; customers do, so I wanted our associates focused on customers. xxxvi One key initiative that was implemented early in the process was to add more employees to the stores to serve customers. When you re an hourly associate and you re trying to cover 3,000 square feet by yourself on a Saturday, that s going to damage morale. xxxvii The company discovered, however, that simply adding more bodies to store floors did not directly translate into these associates spending more of their time interacting directly with customers. Thus, in 2008, Home Depot began a customer service imperative called 60/40 to reallocate associate time from tasking activities to customer facing activities. Data collected on time allocation showed that the Home Depot associates spent only 45 percent of their time directly interacting with customers in The company reported that this percentage had improved to 51 percent in The company introduced 60/40 with the goal that by 2013, at least 60 percent of associate time would be devoted to customer facing activities and 40 percent of their time would be used for tasking activities (e.g., completing reports, reviewing inventory, maintenance activities, etc.). xxxviii Management also believed that there were specific times during the day when full attention must be given to customers. As Ellison noted, we could not address customer service needs because we were too busy doing other things. xxxix Thus, Power Hours were established between 10:00 am and 2:00 on weekdays and all day on Saturday and Sunday when associates were asked to only serve customers, rather than stock shelves, unpack boxes, and review store inventory levels. In addition, Merchandising Execution Teams were established to improve the consistency of merchandise displays. Previously, some replenishment was out-sourced which often led to inconsistencies with merchandise availability and store appearance. By 2011, nearly all of the replenishment was performed by the in-house merchandising execution teams. Marc Powers, head of operations at Home Depot, stated that this program led to considerable improvements in associate product knowledge and opportunistic sales event execution. xl Page 7

8 Tools for Serving Customers Several initiatives were underway by 2010 to use technology to enhance customer service at the Home Depot. First, the company had introduced Bay Sequencing, a system to help associates locate products for customers within the store. Product locations could be different across as many as 1000 stores, making it nearly impossible for associates to efficiently assist customers looking for a specific product. Second, the company invested $64 million on the FIRST Phone, a handheld mobile device. xli Thirty thousand FIRST Phones were distributed to about 2,000 Home Depot stores in xlii Previously, each store used mobile carts that contained a computer monitor and printer powered by a 12 volt boat battery. The FIRST Phone was designed by Home Depot associates and performed many useful functions including the ability to locate specific products within the store, search for products at nearby stores, serve as a mobile point-of-sale register and computer, monitor sales trends, order products, and allow mobile communication with other associates by walkie-talkie or cell phone (Marc Powers, 2010 Investor and Analyst Conference). The FIRST Phone also provided store managers with real-time sales and gross margin productivity data by department, isle, bay, and stock-keeping unit (SKU). xliii Initial reviews by company associates suggested that the first version of the technology may need some refinement. xliv Third, the Home Depot also significantly redesigned the checkout system. The new system allowed multiple associates to run a single register and improve the checkout process. Previously, once an associate signed on to a specific register it could not be used by other associates until they signed out. According to Marc Powers, results were encouraging for the new checkout system with lower customer wait times resulting in immediate increases in customers satisfaction ratings for the checkout process. xlv Fourth, the company also implemented a customer care resolution team, responsible for proactively searching online social websites such as Facebook, Twitter, and others to uncover customer problems and concerns. The team was empowered to contact disgruntled customers and appropriately address their problems. xlvi Finally, the Home Depot introduced a payroll optimization system that allowed for real time payroll management at the store level. This new system provided store managers with storelevel P&Ls, run rates, and weekly payroll expenses on a daily basis. The system greatly improved the scheduling of associates within the store as well. xlvii Associate Rewards and Recognition Blake was also quite aware that even well planned service-related initiatives were highly contingent upon the alignment of associate evaluations and reward systems. Thus, a newly designed performance review program was introduced that relied heavily on customer Page 8

9 satisfaction as the criterion for assessing associate performance reviews. Financial incentives had also been expanded to reward those who delivered excellent service to customers. xlviii In 2007, Blake granted stock options to all assistant store managers and spent $164 million for Success Sharing bonuses for the hourly associates. Expenditures on bonuses during fiscal 2007 represented a six-fold increase over xlix In 2010, Home Depot distributed over $126 million in Success Sharing Bonus Program payments to its associates. l Store managers were also held responsible for implementing the Customer F.I.R.S.T. program in their stores. Store managers were evaluated on how well the program was executed and results from storespecific customer satisfaction surveys. The company collects approximately 300,000 surveys from customers each month. One primary method the Home Depot uses to collect data from customers is an on-line survey that utilizes a specific user ID and password found on register receipts. Customers are asked to go to to complete the survey and enter a contest to possibly win a $5,000 Home Depot gift card. Several programs were also introduced in the stores to reward and recognize associates for superior customer service. Bonuses were awarded to specific stores bi-annually that achieved certain customer satisfaction benchmarks. In addition, the best associates were recognized with the Homer Award, an apron badge and financial incentive that was given when customers provided the name of a specific associate in their customer service survey. The Bravo Program was also introduced for associates to recognize one another for service excellence. Finally, the Home Depot Legends Program recognized associates on the company website for providing impressive customer service. The most remarkable associate stories were further recognized with a trip to headquarters in Atlanta to shoot a video about their accomplishments in service. For example, Jessica Jones, spent weeks of her personal time taking an evening course at a local community college to learn sign language to better communicate with the numerous illiterate professional customers at Home Depot who had difficulty expressing their material needs while in the store. li Own the Pro Blake acknowledged early in his tenure that the professional customer was critically important to success of the Home Depot. lii The company defined the professional customer segment as including general contractors, professional remodelers, tradesmen, small business owners, and repairmen. liii One interview with Ellison reported that the professional customer represented only about 4 percent of its customers based but approximately one-third of total sales for the Home Depot. liv He also indicated that the average ticket of the professional customer was under $5000, but failed to give more specifics. lv The company, however, continued to struggle with how to best attract and retain this highly desirable customer segment. In 2010, Ellison said that the majority of professional sales are made more out of convenience for the professional and are not contractual or large purchases. Page 9

10 We need to make that purchase of convenience the best possible experience. We are going to accept that we are a store of convenience. lvi One of the first programs to be implemented by Blake to better serve the professional customer was the Pro Bid Room. This program allowed the company to better manage large customer orders. To complement this program, the company also revised its delivery service to improve utilization. In 2007, the Home Depot also began to utilize its customer data to better distinguish the profitability and customer lifetime value of various professional customers. The goals of these efforts were to better understand the purchasing activity of specific professional customers and to develop stronger relationships with key customer segments. lvii Marvin Ellison stated at the 2010 Investor and Analyst Conference that the Home Depot had not yet adjusted its service to meet the needs of the professional customer. He suggested that the company needed a more unique service offering for this customer segment. He also noted that the company had numerous problems implementing and executing its professional business including 1) numerous metrics and audits, 2) inconsistent staffing decisions, 3) failure to listen to the professional customer, and 4) overly complicated service process. Future efforts were expected to simplify the activities of the associate service the professional customers, develop a single scorecard, implement a consistent staffing model, and better utilize and act upon the 72,000 monthly professional voice of customer survey responses. The company collected surveys from key pro customers to understand their specific purchasing needs, preferences for the retail environment, and most useful service-related activities provided by the stores. According to Ellison, the key for us is to engage our customers and understand what they re working on. lviii In serving our pro customers, time is money. We need to get them in and out fast. As Ellison noted, the company went deeper into its analytics and reviewed the shopping habits of professionals at its stores. Home Depot officials reviewed when, at what locations, and in what departments professionals shopped in. They wanted to understand the professionals and better serve them. lix In the first quarter of 2011, the Home Depot introduced the F.I.R.S.T. for Pro Program with the goal of driving consistency and simplification. This program, while similar to the Customer F.I.R.S.T. Program used in the retail stores, had several unique initiatives including 1) unique pro power hours, 2) dedicated point of sale staff, 3) lot loading assistance, 4) dedicated professional parking, 5) simplified return policy, and 6) enhanced customer service training focused on the specific needs of the professional. lx Customer Satisfaction, Preference, Purchasing Behavior and Results In just four short years, Blake and his management team had transformed the customer shopping experience at the Home Depot. These initiatives led to significant increases in customer satisfaction. At the end of 2011, the Home Depot reached 78 on the ACSI, only 1 point below Lowe s score of 79. The company made history by achieving the highest point Page 10

11 increase on the American Customer Satisfaction Index in the shortest time period (5 years). From , the Home Depot increased its customer satisfaction score by 11 points, representing the second highest point increase in the history of the American Customer Satisfaction Index. Only one other retailer (MCX) achieved a higher point increase (12 points), but that change occurred over a much longer time period (8 years). lxi Although the Home Depot made significant strides to improve the customer experience in the stores, overall customer preference for the retailer continued to trail Lowe s. In a study by Kanter Retail conducted in August 2011, customers who patronized both the Home Depot and Lowe s (cross shoppers) still preferred Lowe s (46%) to the Home Depot (34%). These finding remained relatively unchanged from 2007 to 2011, as shown in Exhibit 5. lxii The strength of the preference between the two retailers, however, changed significantly from 2007 and 2011, as presented in Exhibit 6. Of those cross-shoppers who preferred the Home Depot, 53 percent preferred the retailer a lot more and 6 percent preferred the retailer somewhat more than Lowe s. This represented a considerable improvement over the results from In 2007, 24 percent preferred the Home Depot a lot more and 50 percent preferred it somewhat more. Compared with the results for Lowe s, only 11 percent preferred Lowe s a lot more and 47 percent preferred the retailer somewhat more than the Home Depot in the 2011 study. The results for Lowe s were notably different from those reported in the previous study. In 2007, 39 percent preferred Lowe s a lot more and 42 percent preferred the retailer somewhat more than the Home Depot. It should be noted that, whereas a stated preference for a retailer doesn t necessarily translate into a transaction, shoppers who are more enamored of a retailer are more likely to pull the trigger and make a purchase or add more items to their basket. lxiii The Home Depot s focus on improving the shopping experience also paid off in terms of several important customer purchasing metrics and financial results in 2011 (See Exhibit 7 for a summary of key quarterly metrics). As discussed earlier, total sales at the Home Depot increased by 4.2 percent and only 1.3 percent at Lowe s in Q Similarly, comparable store sales growth increased by 4.3 percent (3.5 percent in U.S.) for the Home Depot and decreased by 0.3 percent for Lowe s. Also interesting, operating margins were 11.3 percent for the Home Depot and 10.3 for Lowe s. These margins helped the Home Depot improve profitability by 14 percent in Q lxiv One comment by Marvin Ellison was especially pertinent to the recent financial success at the Home Depot: We have a very simple belief: If you combine a compelling merchandising offer with outstanding service, you will get improved transactions. And in our business, improved transactions lead to positive sales growth. lxv Indeed, as shown in Exhibit 7, total transaction growth (number of customer orders) increased by 1.1 percent and average ticket growth Page 11

12 (spending per order) increased by 3.3 percent for the Home Depot in Q lxvi ticket only grew by 0.7 percent at Lowe s during the same period. Average Equally important were the very different results between these retailers for big ticket purchase growth in Q The Home Depot reported 5 percent growth in big ticket purchases, defined by the company as purchases of greater than $900. Meanwhile, big ticket growth, defined as purchases more than $500, decreased by 1.0% at Lowe s. Small ticket purchases, which entail purchases of less than $50, were mostly flat for both retailers. In response to the less than expected financial results for Lowe s, Mr. Robert Niblock, Chairman, President and CEO commented that: Our second quarter consumer survey indicates that high fuel prices remain at the top of consumers' minds as they consider future spending plans. However, recent headlines regarding slowing growth and the U.S. credit rating downgrade underscored the continued weakness in the U.S. economy. The volume of negative news and the unsettling impact on equity markets is having a significant effect on already fragile consumer mindset. More specifically with regard to home improvement spending, consumers continue to focus on small ticket, less than $500 repair and maintenance items and projects. Even after taking into account the challenge of the macro environment, we're still not pleased with our performance this year. For both do-it-yourself and commercial business customers, we must drive more trips, close more sales and build bigger baskets. lxvii More Work Must Be Done According to some critics, the Home Depot still had a lot to improve upon in its stores. As one customer noted, five or six people said welcome to Home Depot. But then I wandered around trying to find someone in the paint isle to help. Ellison agreed by stating: our goal will always be to improve, not maintain. To do that, we have to continue to simplify life for our store associates so they can focus on the customer, provide them the tools to be effective, empower them through learning programs, and reward them when they succeed. lxviii Critics argue that Blake may not be the appropriate leader for the future of Home Depot. Generally the guy who comes in as calmer-in-chief and rights the ship isn t the guy who leads the next wave of growth. lxix Page 12

13 Exhibit 1 Home Depot Annual Financial Statements (FY ) FY 2011 FY 2010 FY 2009 Total Revenues $70,395 $67,997 $66,176 Net Sales Increase 3.5% 2.8% -7.2% Costs of Goods $46,133 $44,693 $43,764 Gross Profit $24,262 $23,304 $22,412 Gross Profit Margin (%) 34.47% 34.27% 33.87% SG&A Expense $16,028 $15,849 $15,902 Depreciation & Amortization $1,573 $1,616 $1,707 Total Operating Expenses $17,601 $17,465 $17,609 Operating Income $6,661 $5,839 $4,803 Operating Margin (%) 9.46% 8.59% 7.26% Interest and Other Expenses $606 $566 $821 Income Before Taxes $6,068 $5,273 $3,982 Income Taxes $2,185 $1,935 $1,362 Net Income After Taxes $3,883 $3,338 $2,661 Net Profit Margin (%) 5.52% 4.91% 4.02% Balance Sheet Cash $1,987 $545 $1,421 Net Receivables $1,245 $1,085 $964 Inventories $ $10,625 $10,188 Other Current Assets $963 $1,224 $1,327 Total Current Assets $14,520 $13,479 $13,900 Net Fixed Assets $24,448 $25,060 $25,550 Other Noncurrent Assets $1,550 $1,586 $1,427 Total Assets $40,518 $40,125 $40,877 Accounts Payable $4,856 $4,717 $4,863 Accrued Salaries & Related Exp. $1,372 $1,290 $1,263 Other Current Liabilities $3,148 $4,885 $4,237 Total Current Liabilities $9,376 $10,122 $10,363 Long-Term Debt $10,758 $8,707 $8,662 Deferred Income Taxes $340 $272 $319 Other Noncurrent Liabilities $2,146 $2,135 $2,140 Total Liabilities $22,620 $21,236 $21,484 Total Stockholders Equity $40,518 $40,125 $40,877 Page 13

14 ACSI Score (1-100) W&M-M-174 Exhibit 2 American Customer Satisfaction Index 2001-Present: Home Depot vs. Lowes Year Page 14

15 Exhibit 3 The Inverted Triangle at Home Depot Stores and customers are positioned at the top, while senior management is at the bottom. Everything in the Company, from senior management to corporate support systems, is designed to support and enable the success of associates and customers. Page 15

16 Exhibit 4 Frank Blake s Response to Scott Burn s Column in MSN Money I'm Frank Blake, the new CEO for The Home Depot. I've read a number of the postings on the MSN message board (unfortunately, there were a lot of them), and we've dispatched a dedicated task force -- working directly with me that is ready and willing to address each and every issue raised on this board. Please give us the chance. There's no way I can express how sorry I am for all of the stories you shared. I recognize that many of you were loyal and dedicated shoppers of The Home Depot... and we let you down. That's unacceptable. Customers are our company's lifeblood -- and the sole reason we have been able to build such a successful company is because of your support. The only way we're going to continue to be successful is by regaining your trust and confidence, and we will do that. We've already taken steps to cure many of the ills discussed on this message board: We will be and already are increasing our staffing in the stores. We're also in the early stages of launching a nationwide program to recruit and hire skilled master trade people to staff our stores so that our customers receive the kind of service and expertise that made The Home Depot great. We're investing significantly in the appearance of our stores to make them an easier and more fun place to shop. And we're making it clear to all our associates that nothing is more important than you, the customer. Every associate knows that his or her number one job is to make you smile and to help you solve your home improvement problem... no matter how big or how small. But the real judge of all of these changes we re making is you. All I ask is that you please give us the opportunity to win you back. When you enter our stores, you should receive a personal greeting. After that, you should encounter a helpful associate who will walk you to find the tools, material or service you need. If you don t, please let us know... just like Scott Burns did. I'd like to thank Scott -- his column about our company was insightful and revealing. You can easily tell that it struck a nerve with me. Scott, we'll do all in our power to again make The Home Depot the store you and your wife, Carolyn, once referred to as "our store." I'd also like to give my thanks to the many people who posted comments on this board. We want them. We need them... to enable us to keep getting better. We're committed to being the company that helped set the standard for customer service excellence in home improvement. Please continue to hold us accountable. You have my personal assurance that every effort will be made to address your concerns. The Home Depot was built on great customer service, and we hope to rebuild your trust on that same tradition -- just give us the chance! Page 16

17 Exhibit 5 Cross Shopper Preference: The Home Depot Vs. Lowes Cross Shopper Overall Store Preference (Among respondents who shopped both The Home Depot and Lowe's in the past year) % 34% 19% % 34% 18% Lowe's The Home Depot Don't know/not sure Source: Home Improvement Retail Perspectives, Kanter Retail (August 2011) Page 17

18 Exhibit 6 Strength of Preference: The Home Depot Vs. Lowes Strength of Preference for The Home Depot Among HD-LOW cross-shoppers who prefer The Home Depot (n=431) % 6% 42% % 50% 26% A lot more Somewhat more A little more Strength of Preference for Lowe's Among HD-LOW cross-shoppers who prefer Lowe's (n=580) % 47% 42% % 42% 19% A lot more Somewhat more A little more Source: Home Improvement Retail Perspectives, Kanter Retail (August 2011) Page 18

19 Exhibit 7 Key Quarterly Metrics: The Home Depot Vs. Lowe s The Home Depot Lowe s Q Q Q Q Total Sales Growth 1.8% 4.2% 3.7% 1.3% Comparable Store Sales Growth 1.7% (US 1.0%) 4.3% (US 3.5%) 1.6% -0.3% Gross Margin 33.9% 34.0% 34.9% 34.5% Operating Margin 10.6% 11.3% 9.9% 10.3% Average Ticket Growth 0.1% 3.3% 2.3% 0.7% Comp Ticket Growth 0.0% 3.3% 2.1% -0.9% Big Ticket (HD >$900/LOW >$500)* -5.0% 5.0% 2.0% -1.0% Small Ticket (< $50) 2.0% 0.0% 0.0% 1.0% Sales Per Sq. Foot Growth 1.9% 4.6% 1.3% -0.3% Total Transaction Growth 1.9% 1.1% 1.8% 2.0% Comp Transaction Growth 1.7% 1.0% -0.5% 0.6% Inventory Growth -0.4% 0.0% 5.7% 2.0% Source: Home Improvement Retail Perspectives, Kanter Retail (August 2011) Page 19

20 i ii iii Claus Fornell, The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference, (New York, NY: Palgrave Macmillan, 2007). iv Claus Fornell, The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference, (New York, NY: Palgrave Macmillan, 2007). v vi Bloomberg Businessweek, November 5, vii The Home Depot - Annual Report FY viii The Home Depot - Annual Report FY ix The Home Depot - Annual Report FY x Dow Jones News Service, August 16, xi xii Dow Jones News Service, August 29, xiii Radio Sales Today, May 10, xiv xv xvi Kanter Retail: Home Improvement Retail Perspectives, August xvii Claus Fornell, The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference, (New York, NY: Palgrave Macmillan, 2007). xviii xix xx xxi xxii xxiii xxiv xxv March 13, xxvi Bloomberg Businessweek, May 7, xxvii Bloomberg Businessweek, November 5, xxviii Bloomberg Businessweek, May 7, xxix Marvin Ellison, Home Depot Investor and Analyst Conference, xxx Chris Roush, Inside Home Depot. xxxi xxxii Bloomberg Businessweek, November 5, xxxiii Bloomberg Businessweek, November 5, xxxiv Marvin Ellison, Home Depot Investor and Analyst Conference, xxxv Bloomberg Businessweek, May 7, xxxvi Bloomberg Businessweek, November 5, Page 20

21 xxxvii Bloomberg Businessweek, May 7, xxxviii Marc Powers, Home Depot Investor and Analyst Conference, xxxix Bloomberg Businessweek, May 7, xl Marc Powers, Home Depot Investor and Analyst Conference, xli Industry Guide: Retail Technology, March xlii Industry Guide: Retail Technology, March xliii Marc Powers, Home Depot Investor and Analyst Conference, xliv Industry Guide: Retail Technology, March xlv Marc Powers, Home Depot Investor and Analyst Conference, xlvi Marvin Ellison, Home Depot Investor and Analyst Conference, xlvii Marc Powers, Home Depot Investor and Analyst Conference, xlviii Bloomberg Businessweek, May 7, xlix The Home Depot - Annual Report FY l The Home Depot - Annual Report FY li Marvin Ellison, Home Depot Investor and Analyst Conference, lii The Home Depot - Annual Report FY liii The Home Depot - Annual Report FY liv Construction Industry News, August 16, lv Construction Industry News, December 8, lvi Construction Industry News, August 16, lvii The Home Depot - Annual Report FY lviii Construction Industry News, August 16, lix ProSalesOnline, May 17, lx Marvin Ellison, Home Depot Investor and Analyst Conference, lxi lxii Kanter Retail: Home Improvement Retail Perspectives, August lxiii Kanter Retail: Home Improvement Retail Perspectives, August lxiv Dow Jones News Service, August 16, lxv Bloomberg Businessweek, November 5, lxvi The Home Depot - Annual Report FY lxvii (August 15, 2011) lxviii Bloomberg Businessweek, November 5, lxix Page 21