US US RetailRetailersers

Present byPresent byKaren Lin & Haoying GuoKaren Lin & Haoying Guo

Industry AnalysisIndustry Analysis

RetailRetail Sector Sector

• Establishments engaged in retailing Establishments engaged in retailing merchandise merchandise

• Generally without transformation Generally without transformation

• Final step in the distribution of Final step in the distribution of merchandise merchandise

Retail SectorRetail Sector

• Highly Competitive Industry Highly Competitive Industry • Common Factors influence the Common Factors influence the

industry:industry:– Cost of goodsCost of goods– Consumer debt levelConsumer debt level– Economic condition Economic condition – Customer preferenceCustomer preference– InflationInflation– EmploymentEmployment– Weather Pattern Weather Pattern

Retailers In the U.S. Retailers In the U.S. Economy Economy

• Retailer trade takes up: Retailer trade takes up: – 11.7% of national employment11.7% of national employment– 12.9% of all establishments12.9% of all establishments

• In 2003, the average retail trade In 2003, the average retail trade employment is 14,911,500 employment is 14,911,500

• In 2003,nonsupervisory workers' In 2003,nonsupervisory workers' average hourly earnings were average hourly earnings were $11.90 $11.90

Monthly Sales For RetailMonthly Sales For Retail

In Millions 2005 Jan 2004 Dec 2004 Nov 2004 Oct

313,730 315,078 311,555 292,856

Estimated Annual Sales: 3.6 Trillions

Value RetailingValue Retailing

• Definition:Definition:– The business of retailing famous-name, The business of retailing famous-name,

quality merchandise at prices at least quality merchandise at prices at least 25% below the regular retail price.25% below the regular retail price.

• Most large retailers are belong to Most large retailers are belong to this catalog. (Such as Wal-Mart and this catalog. (Such as Wal-Mart and Home Dept)Home Dept)

• The value retailing sector’s share of The value retailing sector’s share of total retail sales is 7.5%total retail sales is 7.5%

Wal-Mart

Wal-Mart at a Glance

Wal-Mart Stores, Inc. is the world's largest retailer

The company employs more than 1.5 million associates worldwide

More than 138 million customers per week visit Wal-Mart stores worldwide

Senior Officers

H. Lee Scott --- President and CEO Named in January 2000 25-year veteran

Other Senior Officers Promoted internally

Operations

Wal-Mart Stores Includes: Discount Stores, Supercenters and Neighborh

ood Markets

SAM’S CLUB

International comprised of wholly owned operations in Argentina, Can

ada, Germany, South Korea, Puerto Rico and the U,K, the operations of joint ventures in China and operations of majority-owned subsidiaries in Brazil and Mexico.

U.S. Domestic Competitors

Key Success Factors

Do the same things as other retailers but Better

"Every Day Low Prices"

Technology Sales data sharing with major suppliers

Lasting Relationships with Suppliers One-to-one relationship with medium and small

suppliers.

How Wal-Mart Grows

Building new stores and Clubs in the attractive sites.

Recent Strategy: move towards grocery side

Adding more “Neighborhood Markets”

Expansion of 2004 Domestic

139 new Wal-Mart Stores 130 conversions and/or relocations from Disc

ount Stores to Supercenters 13 SAM’S CLUBs opened

International Square footage increased approximately 46 m

illion square feet (or 8%)

Negative Impact of New Stores

Additional stores take sales away from existing units.

The comparative store sales will be reduced by approximately 1%.

Performance of 2004

Total Company net sales increased 11.6% from fiscal 2003 to $256.3 billion.

Total Assets increased 10.7% to $104.9 billion

International segment had an operating profit increase of 18.6% and a sales increase of 16.6%

4 billion tax paid takes up 1/446 of the total U.S. Federal taxes

Income Statement (millions)

Ratios

2004 2003 2002

Gross Margin 22.5% 22.3% 22.0%

(SG&A)/(Net Sales)

17.5% 17.4% 17.2%

(Interest costs)/(Net Sales)

0.32% 0.42% 0.58%

(Net Income)/(Net Sales)

3.53% 3.46% 3.23%

Segments Ratios

Balance Sheet

Cash Flow Statement

Stocks

Initial Public Offering in 1970 200,000 shares for $16.5 per share

Up to March 14, 2005 4,234,866,944 shares outstanding (11 Stock

splits) $51.60 per share

Annual rate of return from 1970 to 2005 29.56% per year

Dividend

Began paying dividends in 1974 Increased the annual dividend payment

every year Paid out more than $11 billion to

shareholders 2004, the annual dividend payment

increased by 44%

Share Repurchase

Wal-Mart also has a share-repurchase program

Since beginning the program, Wal-Mart has repurchased more than $13 billion in shares.

In 2004, Board of Directors authorized the repurchase of another $7 billion

Options

1-year Stock Chart

1-years Comparison

Some Measures

Total Cash Per Share (mrq):1.3 Return on Assets (ttm):9.36% Return on Equity (ttm):22.99% Book Value Per Share (mrq):11.621 Dividend Yield:1.16%

5-years Stock Chart

5-year Comparison

Stock Chart Since Beginning

Can Wal-Mart Still Grow?

There is definitely room for growth: In U.S., Wal-Mart sales are less than 10 percent

of the retail market. Even smaller market share outside US.

Problems: The same business model works everywhere? Intensive competitions in international market.

Recommendation No one can beat Wal-Mart Owns lots resource and quite experienced in

Retailing Takes time to expand internationally In one year time zone, the Stock price is

lowest.

Buy For Long Term Investment

Retail Industry inHome Improvement

Home centers, lumberyard, and hardware stores were primary retail outlets.

US Retail Sales of Home

Improvement Products,

by Type of Store, 1998:

Industry Overview Traditional retailers: lumberyards & hardware stores. Home centre

A combination of the two Size, concentration on the homeowner, one-stop shopping,

self-service, customer convenience Warehouse-type Home Centre

Created markets by making DIY materials affordable and accessible

Competition leads to acquisition & consolidation (1) Home Depot (1/3 market share, 12.9%) Competitors: Lowe’s Companies, Menard, Hechinger,

Payless Cashways

Consumer

Professional builder Contractor DIYer

Boomers are key in home improvement market

New market: Female homeowner

About The Home Depot Second largest retailer in the U.S. Funded in 1978 in Atlanta, Georgia.

Co-founder: Arthur Blank & Bernard Marcus The world’s largest home improvement retailer.

Operates more than 1,800 stores across North America. Also in Mexico, the District of Columbia, and Puerto Rico.

Brisk pace in store expansion from less than 100 stores in 1989 to almost 800 in 1999.

Owns 82% of real estate.

LeadershipRobert (Bob) L. Nardelli

Chairman, President and CEO Joined HD in December 2000. Former president and CEO of GE

Power Systems. Strategy: Enhancing the core retail network

through distinctive and innovative merchandise, store modernization and technology investment; extending its business through new store formats, online sales and installation services; and by expanding to new geographies and professional customer segments.

Leadership – Exec. VP Francis Blake

Business Development and Corporate Operations. (2002) John Costello

Merchandising & Marketing. (November 2002) Robert DeRodes

Executive Vice President & Chief Information Officer. (2002) Dennis Donovan

Human Resources (April 2001) Frank Fernandez

Secretary and General Counsel (April 2001) Tom Taylor

Home Depot Stores (1984) Carol B. Tomé

Executive Vice President & Chief Financial Officer (1995)

3 Business Segments Home Depot Flagship Stores

First three stores opened in Atlanta in 1979. U.S. and Canadian stores range in size from 45,000 square feet to 165,000

square feet (avg. 106,000 sq. feet of enclosed space + 22,000 sq. feet in the outside garden area.)

Sells 40,000 to 50,000 different kinds of home improvement supplies, building materials, and lawn and garden products.

How-To Clinics, At-Home ServicesSM, Tool Rental Centers, Truck Rental. National brands account 88%+ of the merchandise in the stores. Exclusive brands

EXPO Design Center Over 50 stores in major markets in 16 states and growing Cater to design professionals with home decorating products & services. Full design and installation services with project superintendents to oversee

complete job Other Home Depot Stores

Supply stores for commercial & industrial customers. Landscape Supply stores for landscape & garden pros.

Merchandise Selection& Sales

Stores’ merchandise selection is based on particular customer and climate need, and on local building code requirements. Different stores don’t carry the same products, due to different merchandise demands in different geographical areas.

34% building materials, lumber, floor & wall coverings 27% plumbing, heating, lighting, electrical supplies 15% seasonal & specialty items 14% hardware & tools 10% paint and other products

Key Success Factors Economies of scale Low price Level of customer service Wide array of products

“We are credited with having revolutionized the home improvement industry by offering an unparalleled selection of products and services under one roof.”

3 Sources of Future Growth

Open new stores. 24-hour Home Depot outlets Smaller villager’s hardware stores Urban format stores

Cater to professional customers.

Female Homeowners

News - Summary Over past 4 years, The Home Depot has increased sales

by 60% and earnings per share by 105%.

Increase in cash dividends & share repurchase program.

Acquisition of home centres, supply companies, and distributors.

Oct 10, 2002 - The Home Depot announce to open two sourcing offices in Shanghai and Shenzhen

2002 2003 2004 2005

Annual increase in Cash Dividend

20% 24% 25% 23%

Share Repurchase Program + $2 billion + $1 billion

Reach

$7 billion+ $2 billion

Recent Awards & Recognition 10 Best Boards in the United States, BusinessWeek

(2002) No. 13 Ranking, Fortune 500 (2003) No. 22 Ranking in Profit, Forbes listing of America’s 500

Top Companies (2003) Top 20 Companies for Leaders, CEO Magazine (2002) Excellence in Employee Development, Retail Council of

Canada (2002) Best Friend Award for work with local communities &

youth, LA’s Best (2002) Flex Your Power Energy Conservation Award, Governor

of California (2002)

Operational Highlights

2003 % chg 2002 %

chg 2001

Store count 1,707 11.42 1,532 14.9

3 1,333

Average ticket $ 51.15 3.48 $

49.43 1.62 $ 48.64

Weighted avg. weekly sales per store

$763,000

(1.17)

$772,000

(4.93)

$812,000

Weighted avg. sales persq. foot

$ 370.87 0.18 $

370.21(4.57

)$

387.93

•By Oct. 31, 2004: 1754 stores.

Financial Statements

Financial Highlights– Income Statement

USD$ (in million) 2003 % of Sales 2002 % of

Sales 2001

Net Sales $ 64,816 $ 58,247 $ 53,553

Gross Profit $ 20,580 31.75% $ 18,108 31.11% $ 16,147

Total Operating Expenses $ 13,734 21.19% $ 12,278 21.08% $ 11,215

Interest Expense $ (62) 0.096% $ (37) 0.064% $ 4,957

Net Income $ 4,304 6.64% $ 3,664 6.29% $ 3,044

20032003 vs.

20022002

2002 vs.

20012001

Basic Earning per Share $ 1.88 19.7% $ 1.57 20.77% $ 1.30

Diluted Earning per Share $ 1.88 20.5% $ 1.56 20.93% $ 1.29

# of Outstanding Shares 2,275,220 K (2.51%) 2,333,740 K (0.52%) 2,345,888 K

# of Outstanding Shares (Jan 31, 2005): 2,195,960 K

Financial Highlights – Balance Sheet

2003 2002 2001

Cash $ 2,826 M $ 2,188 M $ 2,477 M

Cash / #of Shares $ 1.24 $ 0.94 $ 1.06Merchandise Inventories/Total Asset 26.36% 27.78% 25.48%

Net Property & Equip. / Total Asset 58.26% 57.21% 58.25%

Total Assets $ 34,437 M $ 30,011 M $ 26,394 M

Stockholders’ Equity $ 22,407 M $ 19,802 M $ 18,082 M

ROA 12.50% 12.21% 11.53%

ROE 19.21% 18.50% 16.83%

Book Value per Share $ 11.041

Financial Highlights– Statement of Cash Flows

USD$ (in million) 2003 2002 2001

Net Cash from Operations $ 6,545 $ 4,802 $ 5,963

Capital Expenditures (3,508) (2,749) (3,393)Net Cash Used in Financing Activities (1,931) (2,165) (173)

Repurchase of Common Stocks (1,554) (2,000) – Cash Dividends Paid to Stockholders (595) (492) (396)

Free Cash Flow= CFO – Cap Exp – Preferred Div – Debt Repayment + New Debt Issues

= $ 3,028 M

Option – Exec. Compensation

Option - continue

Option - continue

The Percent of Class column indicates beneficial ownership of less than 1%, based on 2,241,907,929 shares of common stock outstanding as of April 1, 2004

Derivatives Objective: to decrease the volatility of earnings

and cash flow associated with fluctuations in interest rates.

Several interest rate swaps with a total notional amount of $475M that swap fixed rate interest on our $500M 53/8% Senior Notes for variable interest rates equal to LIBOR plus 30 to 245 basis points and expire on April 1, 2006.

At February 1, 2004, the fair market value of these agreements was $19 million.

Direct Competitor Comparison

Company HDHome Depot

LOWLowe’s Companies

Retail Industry

(Home Improve)

Market Cap 83.42B 43.78B 133.97M

Employees 299,000 116,000 5,190 K

Revenue Growth (ttm) 11.30% 16.40% 13.10%

Revenue (ttm) 73.09B 36.46B 1.20B

Gross Margin (ttm) 33.42% 33.73% 25.23%

EBITDA (ttm) 7.93B 4.61B 1.56M

Operating Margin (ttm) 10.84% 9.70% 2.48%

Net Income (ttm) 5.00B 2.18B 31.00M

EPS (ttm) 2.258 2.70 1.58

P/E Ratio (ttm) 16.82 20.95 16.49

Stock Quote – Summary Traded on the NYSE

Included in the Dow Jones Industrial Average and Standard & Poor's 500 Index.

Symbol: HD Current Price: $37.99 52-week Range: $32.34 - 44.30 EPS (ttm): $2.26 P/E Ratio (ttm): 16.82 Dividend & Yield: $0.40 (1.03%) Price/Sales (ttm): 1.17 Price/Book (mrq): 3.52 Beta: 1.279

Stock Price – 1 Year Chart

1 Year Chart:Home Depot vs. Dow and S&P

Stock Price – 5 Year Chart

5 Year Chart:Home Depot vs. Dow and S&P

Stock Price – Since 1984

Recommendation

Expansion opportunity in foreign market Canada & Mexico

Pay out cash dividends Good return HD’s 1.03% vs. Lowe’s 0.28%

BUYfor long term investment