Home Depot recaps busy quarter - Brief Article

Home Channel News, June 5, 2000 by John Caulfield

ATLANTA -- Home Depot may have miscalculated how much inventory and people it would need for the early spring selling season. But those missteps didn't hold back its first-quarter financial performance, which set several new records for the 21-year-old retailer.

Despite what one official called "cruddy" weather in the first few weeks in April, Home Depot reported a 24 percent sales gain, to $1l.ll2 billion, for the quarter ended April 30. That figure included the first $1 billion sales week in the company's history, which occurred in the last week of the quarter "when the sun finally came out," said Arthur Blank, Home Depot's president and CEO. Same-store sales increased 7 percent. Flooring, home decor and kitchen and bath categories producing higher-than-average sales gains, though lumber sales were lower.

In the quarter, the company opened 41 stores and relocated one, bringing its total to 971 units, which include its operations in Canada and Chile.

During a teleconference for securities analysts, Carol Tome, Depot's senior vp-finance and accounting, reported that company profits soared by 29 percent to $489 million. Its 29.46 percent gross margin was the highest first-quarter gross margin rate in the company's history.

Officials attributed its gross profit gains to four factors: the rigor of its product line reviews with vendors; the influx of more imports into its stores; the expansion of tool rental departments to 178 stores, from 49 a year ago; and training associates to sell projects.

Home Depot achieved its robust profit growth despite the fact that its selling and general administrative expenses were 18.6 percent of sales, vs. 17.9 percent in the first quarter 1999. During the quarter, Home Depot beefed up its in-store personnel for a spring selling season that was late in arriving. It also has been increasing its compensation to employees to retain them in a tight job market.

Apparently, higher pay -- coupled with aggressive recruiting -- minimized the impact of low unemployment rates on Depot's workforce. Bob Burton, the company's vp-investor relations, said that employee turnover was down 10 percent compared to a year ago, and that during that period Home Depot has received over 1 million job applications.

Inventory turnover in the quarter fell to 5.3, from 5.5 in first quarter 1999, again because of a ramping up for a spring selling season. "In retrospect, we'd have done the same thing again" to maintain customer service, Blank said. Customers kept flowing into Depot's stores, which transacted sales with 223 million patrons in the first quarter, a 20.5 percent gain over the same period last year. The average purchase per customer rose to $49.53 from $47.97.

In light of interest rate hikes by the Federal Reserve that could adversely affect home building and home buying, analysts are keenly interested in Home Depot's expansion of its "pro initiative," one of several business strategies that Blank updated for his listeners.

The pro initiative takes stores in given markets and alters their product assortments and services to better serve remodelers and builders. In the latest quarter, Blank said Depot had expanded its "pro initiative" to 132 stores in 15 markets, including Dallas in April and Minneapolis in May.

Depot intends to launch its e-commerce program in Las Vegas this June or July. It will sell online to professional customers first, and then to DIYers soon after. Stores have been staffed to accommodate picking, packing and staging of orders that are ready at "will call" centers. A two-hour turnaround is being offered for Web site orders that can be picked up at stores or shipped. Blank told analysts that he did not expect pros to rush to buy products over the Internet. Consequently, Depot intends to conduct classes in its stores to instruct pros how to order online.

Additional markets will be added in the third quarter. Blank said that fulfillment of these online orders would be tied back to the stores. "The feedback we got from our customers was overwhelming -- they want the same shopping experience online that they get in the stores," said company spokesman Don Harrison.

Blank provided some new details about other programs:

* Depot had installed its major appliance program into 525 of Depot's stores. Its 50-sku assortment has expanded to around 2,000 with the availability of products through Internet links. By year's end, all stores are scheduled to carry appliances.

* Blank told analysts that the company's four stores in Chile achieved double-digit, comp-store sales growth in the first quarter and are now making money. Depot will add two stores in Chile this year and open a store in Buenos Aires, Argentina, in August, one of four stores to open in Argentina this year. In Canada, Home Depot plans to open 15 more stores -- on a current base of 56 units -- in 2000.

* Without providing specific data, Blank told analysts the company has been "very pleased" with the results of its Expo Design Centers. It will add 11 Expos to the 15 already up and running, with San Francisco, Detroit and New Jersey scheduled to get Expos.