Value Delivered: Revisting HD as Retail Exemplar
The last post (Value at Risk: Business Performance, Issues, News) laid out the high level concerns with understanding and improving general business performance. Here we're going to both build on that and take it down to a specific enterprise by re-visiting our prior posts on Home Depot. (Performance Re-visited: Another Trip to HD's Woodshed) As well as try to kill several birds with one boulder, so bear with us. And there are several things that thread thru here perfectly illustrated by the past posts on Citigroup and Dell Computer. In all three cases careful attention to the details of what the companies are doing indicates that they are all well along with putting in place the kind of re-engineering transformation required to turn poor performers into good ones. And in each case there are macro-considerations that also need to be weighed, as Dell's recent results and the resultant analyst outcry about non-delivery indicate. The bottomline here is that HD is putting in place all the right kinds of carefully crafted strategic initiatives that promise to turn it into a high performer once we all come out the other side of the worsening economic downturn and the Housing crisis. Now is the time to learn about, follow and monitor that performance. Not, if you believe our economic analysis and earnings/valuations outlooks put money into a bet on an immediate return.So before we dive deeply into the thing we've been looking forward to for months, a analysis of HD's turn-around, let's set the stage.
Retail Stocks vs the Economy Outlook
At the right are the daily and longer-term results of our monitoring portfolio of retail stocks which went up, often dramatically, yesterday and today as well, in the face of severe market downturns. The new dangerous meme making its' way thruout Wall St. is that the US is going to do much better than a weakening world. Otherwise one couldn't explain the rise of Consumer Staple and Discretionary stocks, Homebuilders, Retailers or the Finance industry. Short of drug-induced hallucinations that is. We'd hope by this time that any reader of this blog has a deeper understanding of the mis-reading of headlines and statistics and, as a result, the real state of the economy. (Markets vs Economy: Dangerous Memes vs Realities)
But just as a brief review plus introducing a new composite chart that compares the most recent Real Consumption and Real Retail Sales data so you can see the headwinds that are facing these folks, and hopefully buy into the argument that all that green is enormously unjustified, consider this chart.
The top shows monthlies back to Jan99 on two different scales. Notice that both Consumption and Sales are now lower than the '01 recession or getting there, did it gradually and are NOW TIPPING OVER into a more rapid decline. Something that becomes even clearer on the quarterly chart going back to Jan93, which puts both indicators on the same scale. Notice Sales accelerating downward away from Consumption and lower than it's been in 15 years !!!
Home Depot's Strategic Reaction
So how has HD reacted ? Well in our last detailed dissection we were damming with faint praise and rather held them as being still in denial but beginning to move on the right initiatives on the right time, if not at least being upfront in their earnings calls and quarterly reports. As Jim Collins points out, rather like a 12-step program, the first step is moving beyond denial and accepting reality. Which takes courage and moral leadership. The next big step is having the additional courage to develop a recovery program that's clever, workable, innovative and practical. And the final steps are to work that program which takes sustained, hard, disciplined effort. Frankly, judging by this composite extract from the annual report, HD couldn't be moving on this path any better. In the UL corner you find a reasonable, though somewhat optimistic strategic assessment of their principle marketspace combined with workable goals for growth. In the UR corner that's translated into time- and event-phased, staged intiatives that win big by focusing on the now and layering on bigger changes for the future. The MiddleRight lays out the kind of "run a better business" set of strategic initiatives combined with the details required to make it workable and credible. The LR then adds on the next layer, the major strategic change initiatives combined with an honest dashboard assessing the current capabilities that makes you believe they not only know what they're talking about but are being honest and realistic about what needs to happen. And the final component, in the LL corner, links these business model, strategic and operational initiatives with specific controls and guidelines on the finance and controls side to encourage one to think they do indeed get it !
If you compare my structured shopping list of suggestions, critiques and assessments from last year to what HD is telling us it's doing they're pretty close. Now either we're both nuts or they're starting to put into place the kind of immediate improvements in a bigger context that should have been put in place when Nardelli came into office. Instead of...well never mind. My opinion and assessments of a matter of very blunt public record (oddly and sadly what he's doing at Chrysler appears to be closer to what's now happening at HD. What a strange world we live in). This chart was put together early last summer and it makes an interesting comparison. (Six Steps to Prosperity: HD Initiatives to Consider)
At the end of the day though it's the next levels of detail down from here that'll be the make or break differences. And finally whether you can tell the differences in each and every store. After the break we go into more specifics on the Marketing and Product Development, Operations and Logistics and Finance & Management System details that further add to the story. We urge you to read them and think about them for their own sakes as well as what we consider an outstanding template and exemplar of what any really good retailed should be doing. Or in fact, in general, any high performance business. Just in case you're interesting here's a complete Powerpoint slideshow that pulls all these charts on HD together into a nifty little package which you're welcome to dload or look at online: Home Depot as Retail Examplar. In fact we hope you do as HD's examples are really worth thinking about for any retailer specifically and businessess in general.
The real bottomline is that HD is doing all the right things, leadership-wise, strategically and operationally - as you'll be able to see in some detail below - and tying it all together with the right kind of management system. And they have the financial resources to weather the storms of the next three years and come out of it a stronger, better competitor delivering more value to their customers. And therefore, likely, more profitability, reasonable growth and stockholder returns. If we were Warren we'd be looking at this as a candidate investment for sure !
Merchandising and Product Strategy
We love this chart to be honest, and you have no idea how much because it encapsulates everything we think ought to be in marketing, merchandising, product management, store operational execution and logistics support all in one set of charts. Eddie Lamber should read this and weep, or be embarrassed. Briefly the UL chart outlines the integrated product category management strategy that is the strategic framework for the new HD while the UL translates that into the marketing execution and management system measurements required. The LR chart then breaks it down further into what's feasible and planned in what timeframe, as opposed to vague arm-wavings. And the piece de resistance' is the LL chart which takes all this conceptual stuff and lays out the specific operational principles to be followed for each major product category, including the tight coupling across the entire enterprise to that market, store ops and logistics become driven by shared goals and measures. Just wonderful.
Logistics and Supply Chain Operations
Over the years more retailers get into more trouble in the last mile from the local warehouse to the front of the store because they're out of stock or have things people don't want or not enough of the things they do. We've known for decades how central logistics is to retail success and for the same period of time have treated is as an also-ran. Now the heart of HD's value prop is customer-value delivery which starts with service but is utterly den pendent on the product mix and availability. The previous chart set laid this out - this chart set dives into the operational details that make you believe HD really gets it and is putting the deep, structural changes in place to deliver on those per product gross margin improvements. This is not just an HD problem but is endemic across every business I've ever worked with - logistics is potentially a critical component of competitive strength and strategic advantage, and is usually treated as an isolated cost to control and minimize. When HD first started the heart of their value delivery was that each store manager ran a locally adaptive store that adjusted mix to local demands and relied on direct store delivery. As store numbers and density grew that become unwieldy and then unaffordable and was turned into a nightmarish, convoluted and jumbled distribution system that neither lowered costs sufficiently or maintained service. IN the UL chart you can see HD firm and public recognition of the essential criticality of SCM - rare in business we assure you, an honest assessment of the current system and darn good sketch of the proposed one. And finally, in the LL corner, you see that equally rare thing - the linking of SCM performance directly to corporate performance and the bottomline. As Fred Smith used to say, "BRAVO ZULU". And yes, we really like this chart too ! :)
Financial Measurements and the Management System
As you may have gathered by now we're firm believers that without a management system that translates strategies into measured execution it's all fantasy or thrashing. This last composite chart we also like because it takes the strategies and takes them down to not only specific financial controls but doesn't make the cardinal sin of imposing accounting/finance measures on business operations. Rather it starts with the big picture strategic context, maps that to capital efficiency requirements and investment return criteria and then takes those down to store level management system principles. And finally, in the LL corner, sketches out the key metrics that tie all this together and can be applied at any level of the business in an integrated hierarchy of goals and measurements.