Home Depot

Company Profile
Reference Code: 3484 Publication Date: June 2005

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TABLE OF CONTENTS

TABLE OF CONTENTS Company Overview ....................................................... 4 Key Facts........................................................................ 4 Business Description .................................................... 5 History ............................................................................ 7 Key Employees ............................................................ 10 Major Products And Services..................................... 15 Products And Services Analysis................................ 16 SWOT Analysis ............................................................ 18 Top Competitors .......................................................... 24 Company View ............................................................. 25 Locations and Subsidiaries ........................................ 29

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HOME DEPOT
Company Overview

COMPANY OVERVIEW
Home Depot is the worlds largest home improvement retailer, and the third largest retailer in the US. Home Depot stores sell a range of home improvement, garden, and lawn products as well as an assortment of building materials. The company operates over 1,500 stores in the US, Canada and Latin America. It is headquartered in Atlanta, Georgia. For the fiscal year ended February 2004 the company achieved revenues that totaled $73.1 BN, an increase of 12.8% against the previous years revenues that totaled $64.8 BN. Fiscal 2004 net earnings totalled $5BN an increase from 2003s $4.3BN.

KEY FACTS

Head Office

Home Depot 2455 Paces Ferry Road Atlanta GA 30339 4024 United States

Phone Fax Web Address Revenues/turnover (US$ Mn) Financial Year End Employees SIC Codes NAICS Codes New York Ticker

+1 770 433 8211 +1 770 384 2356 http://www.homedepot.com 73100

January 299000 SIC 5211 Lumber and Other Building Materials Dealers SIC 5251 Hardware Stores 44411, 44419, 44413 HD

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Business Description

BUSINESS DESCRIPTION
Home Depot is the worlds largest home improvement retailer. The company operates over 1,500 Home Depot, EXPO, and other subsidiary companies throughout the US, Canada and Mexico. Home Depot stores offer a broad assortment of merchandise and services, and serve three primary customer groups: do-it-yourself customers, do-it-for-me customers and professional customers. A typical Home Depot store stocks approximately 35,000 product items, major product groups include: building materials, lumber and millwork; plumbing, electrical and kitchen; hardware and seasonal, and paint, flooring and wall coverings. EXPO Design Center stores offer complete interior design services and installation services to assist its customers in their home decor and re-modeling projects. EXPO Design Center stores feature design showrooms, each with full-size displays to help customers visualize the end result of possible interior design projects. Typically, customers at EXPO Design Center stores are middle to upper income do-itfor-me customers, who purchase merchandise for installation by others. Accordingly, the company offers installation services for most of the products it sells at these stores. Additionally, its trade customers are custom builders, re-modelers, designers and architects. EXPO Design Center stores offer interior design products and installation services in: kitchens, baths, dcor, lighting, flooring, appliances, patio, decorative fabrics, window treatments, home storage and organization and accessories. In addition, the company operates seven urban stores. These offer products for home enhancement and small projects. The company has opened three urban stores, one in Brooklyn, New York, with approximately 61,000 square feet; one in Staten Island, New York, with approximately 79,000 square feet, and the other is a two-level store with approximately 80,000 square feet in Chicago, Illinois. These stores carry approximately 20,000 items, which are selected depending upon the particular neighborhood in which the store is located. The companys four Villagers Hardware stores, all of which are located in New Jersey, have been rebranded as Home Depot urban stores.

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Business Description

The company also has one test store in Texas, The Home Depot Floor Store, which sells only flooring products. This is a pilot operation launched in Plano, Texas. The Floor Store offers flooring products including carpet, ceramic, wood, laminate and vinyl flooring. The company also offers products through two direct marketing subsidiaries, Maintenance Warehouse and National Blinds and Wallpaper. Its Maintenance Warehouse subsidiary is a direct marketer of maintenance, repair and operations products, serving primarily the multi-family housing and lodging facilities management market. The company fills orders through its 21 distribution centers, which are located throughout the US. National Blinds and Wallpaper sells decor products through telephone sales and over the Internet. It markets primarily through magazine advertising aimed at customers seeking the lowest prices. It maintains no inventory, as orders are shipped directly from the supplier to the customer. The company also operates three other wholly owned subsidiaries: Georgia Lighting, Apex Supply Company and Your "other" Warehouse. Georgia Lighting, a specialty lighting designer, distributor and retailer, has seven retail locations in Georgia. Apex Supply Company is a wholesale supplier of plumbing, heating, ventilation and air conditioning (HVAC), appliances and other related professional products, with around 22 locations in Florida, Georgia, Tennessee and South Carolina. Your "other" Warehouse is a plumbing distributor that focuses on special order fulfillment through its four facilities located in Louisiana and Nevada. Internationally, Home Depot has sold its five stores in Chile to its former joint venture partner, Falabella, and has also sold its four stores in Argentina. The company has acquired TotalHOME de Mexico, a large Mexican home improvement retailer with three stores in Monterrey and one in Mexico City. Home Depot has also purchased Del Norte, a four-store chain of home improvement stores in Juarez, Mexico. To complement the national brand name products it offers, the company has formed strategic alliances with vendor partners to market products under brand names that are only offered through The Home Depot. It offers products under more than 30 proprietary and other exclusive brands, including Thomasville kitchen and bathroom cabinets; RIDGID power tools; Behr Premium Plus paint; Mills Pride cabinets; GE SmartWater water heaters, and Vigoro fertilizer.

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History

HISTORY
Bernie Marcus and Arthur Blank formed Home Depot in 1979 in Atlanta, Georgia. The company held its IPO in 1981, and listed on the NYSE three years later. With the proceeds of this, the company acquired Bowater Home Centers in order to extend its presence in the US. The companys first super-sized store was opened in 1986. This was the year in which sales first exceeded $1 billion. The company decided to expand into new markets and launched its first EXPO Design Center in San Diego, in 1990. By this time, the company had over 170 stores nationwide, and sales of over $5 billion. The company entered the Canadian market in 1994 with the acquisition of Aikenhead. Further acquisitions followed in 1997, when Maintenance Warehouse and National Blinds & Wallpaper were added to the company. In that year sales broke $20 billion for the first time. In the following year, the company opened its first South American store in Santiago, Chile. The company continued to expand its range of stores and launched its Villagers Hardware brand in 1999. That same year, the company acquired its wholly owned subsidiary, Georgia Lighting, a specialty lighting designer, distributor and retailer. In January 2000, Home Depot acquired Apex Supply, a wholesale distributor of plumbing, HVAC, appliances and other related products. Also that year, the company opened the first Home Depot stores in Argentina and Canada, and also opened a test store in Plano, Texas, offering flooring products. In October 2001, the company sold its five stores in Chile to its former joint venture partner, Falabella. Also that year, the company acquired Your "other" Warehouse. This subsidiary was a plumbing distributor that focused on decorative and commercial plumbing products, including special orders. Also during 2001, the company acquired TotalHOME de Mexico, a large Mexican home improvement retailer that has three stores in Monterrey and one in Mexico City. In February 2002, the company sold its four stores in Argentina. Then the following month, Home Depot announced that it had entered into an agreement to purchase Del Norte, a four-store chain of home improvement stores in Juarez, Mexico.

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History

Later that year, the company opened the first three of its Home Depot urban stores (two in New York and one in Chicago). The Villagers Hardware stores were rebranded as urban stores in connection with this new venture. Meanwhile, in September 2002, the company joined its Mid-Atlantic division and Southeast division to form a new division that serviced stores in the Mid-Atlantic and Southeastern US and Caribbean. It was renamed the Eastern Division Further consolidation occurred in January 2003, when Home Depot consolidated its New England division with its Eastern division, headquartered in Atlanta, Georgia. The expanded Eastern division supports more than 600 Home Depot stores and has over 110,000 associates. The Home Depot announced in September 2003 that it has entered into an agreement to acquire Tampa, based, Installed Products USA, LLC and Installed Products of California, Inc. The privately owned IPUSA, one of the largest installers of residential replacement roofing in the United States, had been a contractor to Home Depot for roofing installation since 1997. The company announced that it has signed a definitive agreement to acquire Atlantabased RMA Home Services Inc. in November 2003, a contract installer of replacement windows and siding. RMA was to become part of Home Depots AtHome Services group, the business unit that provides home installation services for its "do-it-for-me" customers. The Home Depot confirmed in January 2004 it has completed the purchase of Creative Touch Interiors (CTI), a leading turnkey design center provider for major homebuilders in Southern California and Las Vegas. Home Depot & MetLife Auto & Home announced in March 2004 that they would be joining forces to provide repair materials and installation services for MetLife Auto & Home customers. This enhanced service was to be be available nationally to customers reporting insurance claims that involve home repairs. Home Depot announced in May 2004 that it has entered into an agreement to acquire White Cap Construction Supply, Inc., a leading distributor of specialty hardware, tools and materials targeting large- and medium-sized construction contractors. The acquisition would expand its professional customer market base. The company announced it had signed a definitive agreement - also in May 2004 - to acquire Home Mart, the second largest Mexican home improvement retailer. Home

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History

Depot planned acquire 20 Home Mart locations, bringing its total store count in Mexico to 39 stores. The Home Depot announced in June 2004 that it will formally create a business development operation based in China and named Bill E. Patterson to the newly created position of President of The Home Depot Asia. Mr. Patterson lead the companys expansion into China, one of the largest and fastest growing markets in the world. July 2004 saw the company announce plans to establish a new technology center in Austin, Texas, and a separate customer service center for The Home Depot Supply division in New Braunfels, Texas. In February 2005, the Home Depot and Mark Burnett Productions announced that the companies had entered an alliance to develop programmes that highlight the Home Depots products and services in Burnett produced television programming. Through the partnership, the Home Depot will be integrated into multiple MBP programs including the Apprentice III and the Contender. The presence of Home Depot products on these reality TV shows is seen as valuable marketing by the company.

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Key Employees

KEY EMPLOYEES

Name
Robert L. Nardelli Tom Taylor Francis Blake Gregory D. Brenneman Richard H. Brown Dennis M. Donovan Carol B. Tome Francis S. Blake

Job Title
Chairman of the Board, President, Chief Executive Officer Executive Vice President Executive Vice President Director Director Executive Vice President of Human Resources Chief Financial Officer, Executive Vice President Executive Vice President Business Development and Corporate Operations

Board
Executive Board Executive Board Executive Board Non Executive Board Non Executive Board Senior Management Senior Management Senior Management

Compensation
$20,030,158

$3,412,602 $3,029,182 $1,779,926

Robert P. DeRodes

Executive Vice President Information Technology, Chief Information Officer

Senior Management

$7,311,624

John H. Costello

Executive Vice President Merchandising and Chief Marketing Officer

Senior Management

Frank L. Fernandez

Executive Vice President, Secretary, General Counsel

Senior Management

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Key Employee Biographies

KEY EMPLOYEE BIOGRAPHIES

Robert L. Nardelli
Board: Executive Board Job Title: Chairman of the Board, President, Chief Executive Officer Since: 2000 Age: 54 Salary: $11,153,668 Total Annual Compensation: $20,030,158 Robert L. Nardelli has been President and Chief Executive Officer since December 2000 and Chairman since January 1, 2002. Prior thereto, Mr. Nardelli served as President and Chief Executive Officer of GE Power Systems, a division of General Electric Company, since 1995. Mr. Nardelli serves as a director of The Coca-Cola Company.

Tom Taylor
Board: Executive Board Job Title: Executive Vice President Taylor joined Home Depot Stores at 16 and worked his way up from part time associate, to Department Head, Assistant Store Manager, Store Manager, District Manager,and in 1996 he was appointed to Regional Vice President in the Southwest division.From 2001 to 2002 Taylor served as Senior Vice President of Pro Business, then from 2002 to 2005, he served as division president, Eastern Division. He was promoted to this post in February 2005.

Francis Blake
Board: Executive Board Job Title: Executive Vice President Blake joined the Home Depot in 2002, as Executive Vice President of Business Development and Corporate Operations. Blake previously served as Deputy Secretary for the US Department of Energy, a role similar to that of chief operating officer in the private saector. He has also served in a variety of executive roles at General Electric. Blake has also served as General Counsel for Vice President George Bush, and law clerk to Justice Stevens of the U.S Supreme Court.

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Key Employee Biographies

Gregory D. Brenneman
Board: Non Executive Board Job Title: Director Since: 2000 Age: 41 Mr. Brenneman has been Chairman and Chief Executive Officer of TurnWorks, Inc., a private equity firm, since October 2002. President and Chief Executive Officer of PricewaterhouseCoopers Consulting from June 2002 to October 2002. President of Continental Airlines, Inc. from 1996 to 2001 and member of the Board and Chief Operating Officer of Continental Airlines from 1995 to 2001. Member of the Board of Automatic Data Processing, Inc.

Richard H. Brown
Board: Non Executive Board Job Title: Director Since: 2000 Age: 55 Mr. Brown has been Chairman and Chief Executive Officer of Electronic Data Systems Corporation from 1999 to March 2003. Chief Executive Officer of Cable & Wireless plc from 1996 to 1998. President and Chief Executive Officer of H&R Block, Inc. from 1995 to 1996. Member of the Board of E.I. du Pont de Nemours and Company. Member of: The Business Council, The Business Roundtable, The U.S. France Business Council, The U.S. - Japan Business Council. Member of the Board of Trustees of Southern Methodist University.

Dennis M. Donovan
Board: Senior Management Job Title: Executive Vice President of Human Resources Since: 2001 Age: 54 Salary: $1,354,768 Total Annual Compensation: $3,412,602 Mr. Donovan has been Executive Vice President - Human Resources since April 2001. From October 1998 until that time he served as Senior Vice President - Human Resources of Raytheon Company, and from February 1986 until September 1998 he

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Key Employee Biographies

served as Vice President - Human Resources of GE Power Systems, a division of General Electric Company.

Carol B. Tome
Board: Senior Management Job Title: Chief Financial Officer, Executive Vice President Age: 46 Salary: $954,409 Total Annual Compensation: $3,029,182 Ms. Tome has been Executive Vice President and Chief Financial Officer since May 2001, and prior thereto had been Senior Vice President - Finance and Accounting/ Treasurer since February 2000. From 1995 until 2000, she served as Vice President and Treasurer. From 1992 until 1995, when she joined The Home Depot, Ms. Tome was Vice President and Treasurer of Riverwood International Corporation. Ms. Tome serves as a director of United Parcel Service, Inc.

Francis S. Blake
Board: Senior Management Job Title: Executive Vice President - Business Development and Corporate Operations Since: 2002 Age: 53 Salary: $1,726,671 Total Annual Compensation: $1,779,926 Mr. Blake has been Executive Vice President - Business Development and Corporate Operations since March 2002. He was formerly the Deputy Secretary of Energy from May 2001 until March 2002. From June 2000 until May 2001 he was a Senior Vice President at General Electric Company and was Vice President of GE Power Systems, a division of General Electric Company, from February 1996 until June 2000.

Robert P. DeRodes
Board: Senior Management Job Title: Executive Vice President - Information Technology, Chief Information Officer Since: 2002 Age: 52

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Key Employee Biographies

Salary: $1,752,549 Total Annual Compensation: $7,311,624 Mr. Derodes has been Executive Vice President - Information Technology and Chief Information Officer since February 2002. He previously served as President and Chief Executive Officer of Delta Technology, Inc. and Chief Information Officer for Delta Airlines, Inc. from September 1999 until February 2002. From February 1995 until September 1999 he was Senior Vice President - Operations and Technology for Delta Technology, Inc. From February 1995 to September 1999, he served as Senior Technology Officer at Citibank for the Card Products Group.

John H. Costello
Board: Senior Management Job Title: Executive Vice President - Merchandising and Chief Marketing Officer Since: 2002 Age: 55 Mr. Costello has been Executive Vice President - Chief Marketing Officer since November 2002. He was previously the Advisor and Chief Global Marketing Officer for Yahoo! from September 2001 until November 2002. From September 1999 until August 2001 he was the Chief Executive Officer of MVP.com. He was President of AutoNation from December 1998 until August 1999 and Senior Executive Vice President of Sears from April 1993 until December 1998.

Frank L. Fernandez
Board: Senior Management Job Title: Executive Vice President, Secretary, General Counsel Since: 2001 Age: 52 Frank Fernandez has been Executive Vice President - Corporate Secretary & General Counsel since April 2001. From 1990 until that time he was managing partner at Fernandez, Burstein, Tuckzinski and Collura, P.C., in Albany, New York.

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Major Products And Services

MAJOR PRODUCTS AND SERVICES

Home Depot is the worlds largest home improvement retailer and the third largest retailer in the US. It offers the following home improvement products and services: Products: - Building Materials - Cleaning Supplies - Dcor - Electrical - Flooring - Garden Center - Gifts - Hardware - Heating and Cooling - Kitchen and Bath - Lighting and Fans - Paint - Plumbing - Storage - Tools - Windows and Doors Services: - Customer Education Programs - Tool Rental

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Products And Services Analysis

PRODUCTS AND SERVICES ANALYSIS

For the fiscal year ended February 2004 Home Depot achieved revenues that totaled $64,816 million, an increase of 11.3% against the previous years revenues that totaled $58,247 million. The companys revenues are not derived from any distinct business categories and are therefore not reported on a divisional basis. Fiscal 2003 net sales growth was driven by an increase in comparable store sales of 3.8%, sales from the 175 new stores opened during fiscal 2003 and sales from the 203 new stores opened during fiscal 2002. The increase in comparable store sales in fiscal 2003 reflects a number of factors. Comparable store sales in fiscal 2003 were positive in 10 of the 11 selling departments. The companys lawn and garden category was the biggest driver of the increase in comparable store sales for fiscal 2003, reflecting strong sales in outdoor power equipment, including John Deere tractors and walk-behind mowers, as well as snow throwers and snow blowers. Lumber was another strong category during fiscal 2003, driven primarily by commodity price inflation. Additionally, Home Depot had strong sales growth in its kitchen and bath categories and in its paint department reflecting the positive impact of new merchandising initiatives. During fiscal 2003, the company added its Appliance initiative to 826 stores bringing the total number of stores with the Appliance initiative to 1,569 as of the end of fiscal 2003. Additionally, during fiscal 2003, each store was set with the new Color Solutions Centers, which drove sales growth in interior and exterior paint, as well as pressure washers. Finally, comparable store sales growth in fiscal 2003 reflects the impact of cannibalization. The growth in net sales for fiscal 2003 reflects growth in net service revenues, which increased 40% to $2.8 billion in fiscal 2003 from $2.0 billion in fiscal 2002, driven by strength in a number of areas including countertops, HVAC, kitchens and Home

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Products And Services Analysis

Depots flooring companies. The company continued to drive its services programs, which focus primarily on providing products and services to do-it-for-me customers. These programs are offered through Home Depot and EXPO Design Center stores.

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SWOT Analysis

SWOT ANALYSIS
The Home Depot Inc. operates Home Depot stores, which are warehouse-style stores selling building materials, home improvement supplies and lawn and garden products, primarily to do-it-yourselfers. In addition, the company operates EXPO Design Center stores, which offer products and services primarily related to design and renovation projects; Home Depot Landscape Supply stores, which service landscape professionals and garden enthusiasts with lawn, landscape and garden products, and Home Depot Supply stores serving primarily professional customers. At the end of the fiscal year ended February 1, 2004 the company was operating 1,707 stores in total in the United States, Canada and Mexico.

Strengths
Large, diverse and growing retailer Business model Distinctive product range New capex priorities

Weaknesses
New store productivity remains weak Rising expenses Store layout and appearance

Opportunities
Growth in global sourcing Payback from IT investment North American growth potential remains International expansion

Threats
Competitive factors Overlap between Home Depot and Lowes Industry slowdown

Strengths
Large, diverse and growing retailer The Home Depot, Inc. is the worlds largest home improvement retailer and the second largest retailer in the United States, based on net sales for the fiscal year ended February 2004 (fiscal 2003) which were $64,816 million. At the end of fiscal 2003, the company were operating 1,707 stores. Most of the companys stores are either Home Depot stores or EXPO Design Center stores. In addition to Home Depot and EXPO Design Center stores, the company also has two store formats focused on the professional customer called The Home Depot

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SWOT Analysis

Supply store and Home Depot Landscape Supply. At the end of fiscal 2003, Home Depot was operating five Home Depot Supply stores and 11 Home Depot Landscape Supply stores. The company also has two stores located in Texas and Florida called The Home Depot Floor Store that sell primarily flooring products. The company currently plans to open a total of 175 stores during fiscal 2004, including Home Depot stores and other formats. Business model The operating strategy of Home Depot is to offer a broad assortment of high-quality merchandise and services at competitive prices using highly knowledgeable, serviceoriented personnel and strong marketing and credit promotions. Also the companys associates knowledge of products and home improvement techniques and applications is very important to its marketing approach and the ability to maintain customer satisfaction. Home Depot regularly checks competitors prices to ensure that its prices are competitive within each market. This model has proved to be successful considering the companys consistent year-on-year revenue growth. Distinctive product range A typical Home Depot store stocks approximately 40,000 to 50,000 products during the year, including both national brand name and proprietary items. To complement and enhance its product selection, the company has strategic alliances and exclusive relationships with certain suppliers to market products under a variety of wellrecognized brand names. At the end of fiscal year 2003, Home Depot offered a number of proprietary and exclusive brands across a wide range of departments including, but not limited to, John Deere lawn and garden tractors; Thomasville kitchen and bathroom cabinets; Silestone countertops; RIDGID power tools; Behr Premium Plus paint; Mills Pride cabinets; Husky hand tools; GE SmartWater water heaters; Philips light bulbs; Toro lawn mowers; Vigoro lawn care products; GAF roofing products; Honda lawn mowers and Lithonia Lighting products. New capex priorities The most important changes to Home Depots investment themes surround its new capital expenditure priorities. First, cap-ex will grow 3% in 2004 compared to 31% in 2003 - a signal that management recognizes the importance of not over investing in a maturing business. Second, approximately 43% of the 2004 capex budget will be earmarked for remodeling older stores and upgrading IT systems. This compares with 33% in the previous year. In fact, Home Depot plans to remodel all stores within the fluorescent lighting

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SWOT Analysis

next three years with either new paint and signage, or full-scale gut and renovate remodels. The other significant shift in Home Depots capital expenditure program is a reduction in new store development. Commitments that should enhance Home Depots competitive position.

Weaknesses
New store productivity remains weak Weak new store productivity reflects Home Depots diminishing real estate opportunities, as the company is beginning to face issues with saturation. New store productivity declined to an estimated 70% in FY03 versus 76% in. This is in contrast with strong new store productivity for Lowes, which is expected to achieve new store productivity of 80% in FY03, driven by continued expansion into higher-volume metro markets. Rising expenses Home Depot has experienced five consecutive years of rising expenses (as a percentage of revenue), similar to other competitors. However, Home Depots expense ratio has increased at a faster pace, rising an estimated 120 basis points from FY99 to FY03, compared with a 60 basis point increase for Lowes. This has driven a narrowing in the gap between the two companies in favor of Lowes. It is estimated that Lowes expenses per foot are still as much as 19% lower than Home Depots at approximately $63 versus $78. Store layout and appearance Home Depot is often criticized for the inconsistencies in the companys store layout and appearance. This has led to customer dissatisfaction with the company, and negative publicity. The companys new stores employ modern initiatives, while its older stores do not. Competitors such as Lowes appear more effective at upgrading old stores with new merchandising initiatives and techniques, therefore Home Depot should look to use Lowes as an example to upgrade its older stores.

Opportunities
Growth in global sourcing A growing mix of imports will lead to further gross margin expansion. Home Depot currently imports 8% of its purchase while Castorama, a UK competitor imports approximately 20% of its merchandise. Importantly, it is estimated that gross margins

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SWOT Analysis

on direct imports are as much as 1,000 basis points higher than the current company average. Further, Home Depots private label goods also carry above average margin, and will represent a growing portion of the business. Payback from IT investment Home Depot has increased its capex budget for technology tenfold over the last three years to $360 million in fiscal 2003 from $30 million in fiscal 2000. Accordingly, the company is now well positioned to reap payback from these investments. The company is also pursuing a number of new technology projects that could improve unit level efficiency, thereby enhancing potential customer service levels, as well as revenues per payroll hour. Home Depot could experience higher and more competitive sales growth, driven by better customer service and in-stock positions. Already, Home Depot is redeploying labor to the selling floor as it achieves efficiency gains at the front and back ends of its stores. The company could also raise its gross through new assortment planning, pricing optimization and markdown management tools that could reduce the number and extent of markdowns. Further RTV and new POS software and terminals could improve cashier accuracy and reduce the incidence of fraud, thereby driving lower shrink rates. North American growth potential remains Home Depot has better growth prospects in North America. Home Depots strategies for extending and expanding its business are consistent with this view. Key growth initiatives include Home Depots pro-initiative, special order sales, At Home Services and Builder Solutions Group. These businesses continue to be delivering aboveaverage sales growth and gross margin. International expansion The Home Depot is also spreading its wings further a field to avoid losses which would occur from containing its business in one market. It has entered the Mexican market, a $12.5 billion home improvement market opportunity. At the end of 2003, the company had established 18 stores and is now the largest home improvement retailer in Mexico. It has also continued profitable growth through its 102 Home Depot stores in Canada, 13 of which opened during 2003. In July 2004 the company also announced its intentions to enter the Chinese market, one of the largest and fastest growing markets in the world.

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SWOT Analysis

Threats
Competitive factors Home Depots business is highly competitive, based in part on price, store location, customer service and depth of merchandise. In each of the markets that it serves, there are a number of other home improvement stores, electrical, plumbing and building materials supply houses and lumber yards. With respect to some products, the company also competes with discount stores, local, regional and national hardware stores, mail order firms, warehouse clubs, independent building supply stores and, to a lesser extent, other retailers. In addition to these entities, the companys EXPO Design Center stores also compete with specialty design stores or showrooms, some of which are only open to interior design professionals. Due to the variety of competition Home Depot faces, it is unable to precisely measure the impact on sales competitors have. The company estimates that its share of the U.S. home improvement industry is approximately 11% and the company believes it is an effective and significant competitor. Overlap between Home Depot and Lowes Rising store overlap between Home Depot and Lowes is another key concern, particularly as Lowes increasingly penetrates top-25 markets -Home Depots most profitable stores. 55% of Lowes locations are within 5-miles of a Home Depot store, while 42% of Home Depots stores are within 5-miles of Lowes figure which are more acute in the top-25 markets. In these cities, 75% of Lowes stores overlap with Home Depot, but only 36% of Home Depots stores overlap with Lowes. This overlap should continue to grow as Lowes enters Home Depots incumbent markets. Importantly, it is not uncommon for Home Depots sales to decline up to 15% when faced with a nearby entrance from Lowes. Industry slowdown The companys decision to slow store growth to 10% highlights Home Depot as a mature growth story. Accordingly, this has once again raised concerns about industry saturation. These concerns are augmented by Home Depots limited success with alternative growth platforms, like EXPO. The U.S. home center potential is valued at approximately 3,500 stores. With Home Depot and Lowes opening a combined 300 stores a year in the U.S., it is anticipated

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SWOT Analysis

that the industry could reach saturation within the next four years. Importantly, Home Depots weak new store productivity is an early indicator that the company is facing saturation.

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Top Competitors

TOP COMPETITORS
The following companies are the major competitors of Home Depot: 84 Lumber Company Amazon.com, Inc. Best Buy Co, Inc. Builder Marts of America, Inc. Builders FirstSource Big Lots, Inc. Costco Wholesale Corporation Kmart Corporation Lanoga Corporation P.C. Richard & Son Sears, Roebuck and Co. TruServ Corporation Wolseley plc Ace Hardware Building Materials Holding Corporation Fastenal Company Canadian Tire Corp Sears Canada Lowes Companies Inc Menards Inc True Value Company Primus, Inc. Tractor Supply Company

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Company View

COMPANY VIEW
A statement by Bob Nardelli, chairman, president and CEO of Home Depot, follows. This statement has been taken from the companys 2004 Annual Report: Looking back at 2004, our strong performance was the result of focusing on our core purpose: Improve Everything We Touch. This core purpose, which we shared with our associates at our 25th anniversary celebration last summer, captures both who we are as a company and how we came together as a team in 2004 to build on our proud past and create an even brighter future. Driven by our core purpose, we focused on the execution of our unwavering strategy to enhance the core, extend the business and expand our markets. As a result, we delivered record financial performance, with sales growth of 12.8% to $73 billion. To put that into perspective, from 2000 to 2004, we have grown our top line sales by more than $27 billion, roughly the sales of a company ranking among the top 60 in the Fortune 500. Earnings per diluted share grew 20.2% to $2.26 in 2004. Average ticket reached $54.89, gross margin climbed to 33.4% and operating margin increased to 10.8% all company records. We also drove comparable store sales of 5.4%, our best comparable store sales performance since 1999. At the same time, we maintained one of the strongest balance sheets in retail, ending the year with shareholders equity of $24 billion; $39 billion in assets, including $2.2 billion in cash and short-term investments; and a debt-to-equity ratio of 8.9%. We had a great year when measured across virtually every key metric. Our outstanding financial performance allowed us to continue reinvesting in our business and return approximately $4 billion of cash to our shareholders last year through share repurchases and dividends. Over the past four years, total share repurchases and dividends returned to shareholders equated to $3.90 per diluted share, or approximately 56% of our cumulative earnings. I could not be more proud of what our 325,000 associates achieved from both an operational and a financial perspective. In 2004, we accomplished something even more meaningful: building a foundation for continued growth and profitability well into the future. Enhancing the Core In 2004, we continued our focus to improve the customer experience in our stores by investing approximately $1 billion in store remodels and refreshes.

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Company View

At the center of these efforts were continued performance improvements from major merchandising resets in core areas such as lighting, flooring, kitchen and appliances, to name a few. We also launched a steady stream of innovative and distinctive new products that received a record number of accolades from leading consumer publications. We continued to use technology, installing human resource and financial systems, to improve our operating systems and enable future growth. And, in all U.S. stores, we completed our installation of POS systems, which allowed us to roll out cordless scan guns to all stores and have over 1,000 selfcheckout systems in place. These technologies shorten checkout times and enhance the customer experience. We invested heavily not only in our physical assets, but also in our associates, through more than 23 million hours in learning, which helped our associates deliver better customer service. We enhanced our compensation and rewards programs with record Success Sharing payouts of approximately $90 million. We launched exciting new hiring partnerships with AARP and the Departments of Defense, Veterans Affairs and Labor, and we added new benefits programs that are available to full- and parttime associates, making us an employment practices leader in the retail industry. Extending the Business We opened 183 net new stores, including several new and exciting store formats in Manhattan, New York and Park Royal, West Vancouver. These stunning new urban formats represent the best of The Home Depot when it comes to innovation in design, merchandising, product selection and service delivery, and have opened up future revenue opportunities for The Home Depot. Driven by our core purpose, we focused on the execution of our unwavering strategy to enhance the core, extend the business and expand our markets. As a result, we delivered record financial performance, with sales growth of 12.8% to $73 billion. To put that into perspective, from 2000 to 2004, we have grown our top line sales by more than $27 billion, roughly the sales of a company ranking among the top 60 in the Fortune 500. We also continued to focus on services, with 23 national programs handling more than 11,000 installations per weekday. Our services revenue increased by 28% in 2004. Responding to the growing demand for online shopping, we revamped our homedepot.com site, making dramatic improvements in the overall navigability of the site with more than 15,000 product SKUs for sale online, including appliances. All of these extensions to our business are proof positive that our market-back customer

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Company View

approach is allowing us to successfully offer the right products and services to meet the changing needs of our diverse customer base. Expanding the Market We also made several important moves to expand our global market presence. With the acquisition of Home Mart in Mexico, we have become the largest home improvement retailer in that market in less than three years with 44 stores at year-end. In Canada, we celebrated our 10-year anniversary in 2004 and opened 15 stores, bringing our total there to 117. We also announced plans to expand our presence in China, capitalizing on our learning from our two merchandising offices, to enter the retail sector in this rapidly growing market. We made several important acquisitions within the professional customer market: most notably White Cap Construction Supply, in June 2004, a leading professional distribution business; Creative Touch Interiors, in January 2004, a leading national design center partner for production homebuilders, which is now part of The Home Depot Supply, Builder Solutions; and Litemor, in February 2005, Canadas largest national commercial lighting distributor. These acquisitions give us strong entry points into the $400+ billion professional market. We intend to continue growing in the market both organically and through future acquisitions. Improve Everything We Touch We celebrated our 25th anniversary in 2004 and used this year to reaffirm the values that have made this company so special. We rejuvenated our Team Depot volunteer program by creating our first annual Week of Service, contributing more than 260,000 volunteer hours in just seven days through more than 1,600 projects in our communities. That same spirit of giving back and supporting our communities vividly came to life as four hurricanes struck the Southeastern U.S., and The Home Depot mobilized to deliver the largest relief and resupply effort in our companys history. In total, we donated more than $4 million in contributions to rebuilding efforts throughout the impacted areas. We also stepped up and recommitted to our troops serving overseas, with a $1 million tool donation to support their rebuilding efforts in Iraq. Finally, we witnessed our own Olympic Job Opportunity Program associates pursue their dreams of winning as they participated in the Olympics and Paralympics in Athens, Greece, bringing home a record 41 medals.

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Company View

These and other efforts reflecting our values earned us prestigious recognition, including the 2004 Citizenship in Action Award from the U.S. Chamber of Commerce and the Freedom Award from the U.S. Department of Defense. 2005: A Turning Point We have built an impressive track record of performance and success over the past several years and have a tremendous amount of momentum as we move into 2005. Capitalizing on that momentum will require continued discipline and focus on execution. As we open 175 new stores in 2005 and continue to invest in the modernization of our stores, it is customer satisfaction, customer conversion and average ticket that will be key to driving growth in our core retail business. With approximately 1.3 billion customer transactions a year, even slight improvements in these key metrics can drive exponential gains in our financial performance. At the same time, we will stay focused on developing multiple platforms for sustainable, profitable growth in exciting new customer markets, product and service categories, and new geographies. 2005 is a turning point in our history: a year to build on our strong momentum and proven strategy, to continue to execute on our plan and to continually improve the customer shopping experience. This is a company with a proud past and increasingly bright future and we recognize that our associates are our competitive advantage. In the four years I have been here, our 325,000 orange-blooded associates have proven to me time and again that when we set our minds on something, we always get it done the right way and that is exactly what we intend to do in 2005. Thank you for your continued support, which was instrumental in helping us deliver on our core purpose to Improve Everything We Touch in 2004. I hope you are as excited as I am about the opportunities that lie ahead for our great company.

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Locations and Subsidiaries

LOCATIONS AND SUBSIDIARIES

Head Office
Home Depot 2455 Paces Ferry Road Atlanta GA 30339 4024 United States P: 1 770 433 8211 F: 1 770 384 2356 www.homedepot.com

Other Locations and Subsidiaries

Expo Design Centers EXPO-Queens 73-01 25th Avenue East Elmhurst NY 11370 United States P: 1 718 533 4600 Maintenance Warehouse 10641 Scripps Summit Court San Diego CA 92131 United States P: 1 800 431 3000 www.mwh.com Apex Supply Company PO Box 565427 Dallas TX 75356 5427 United States P: 1 214 741 5463 F: 1 214 744 4193 www.apexsupplyco.com

The Home Depot Special Order Center United States

Georgia Lighting 530 14th Street Georgia GA 30318 5418 United States P: 1 404 875 4754 F: 1 404 872 4861 www.georgialighting.com Home Depot USA Inc South Chase 13121 S Orange Blossom Orlando FL 32837 United States P: 1 407 240 2491

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HOME DEPOT
Locations and Subsidiaries

Home Depot of Canada Inc Nepean 1900 Baseline Road Ottawa Ontario Canada P: 1 613 723 5900 White Cap Construction Supply, Inc 3120 Airway Ave Costa Mesa CA 92626 United States P: 1 714 850 0900 F: 1 714 557 8468 www.whitecapdirect.com Home Depot Landscape Supply 2560 Satellite Blvd. Duluth GA 30096 United States P: 1-866-589-0561

HD Development of Maryland Inc United States

Floors, Inc 1775 Brightseat Rd Landover MD 20785 3787 United Kingdom P: 1 301 772 5800 F: 1 301 772 1170 www.floors-inc.com

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