home depot transcript

The Home Depot 2008 Investor Day

June 5, 2008

Diane: Good morning, and welcome to our Investor and Analyst Conference. I would like to remind everyone today that today’s presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties. These risks and uncertainties include but are not limited to those factors identified in our filings with the Securities and Exchange Commission. It is now my pleasure to introduce our Chairman and CEO, Frank Blake, to begin our presentations.

Frank: Thank you, Diane, and good morning, everyone. And thank you for taking the

time to participate in our 2008 Investor and Analyst Conference. There is a saying that change comes through repetition. So most of what you’ll hear today will be similar to what you heard last year. We’re focusing on the core, investing in our five priorities, and exercising disciplined capital allocation. I hope through the course of the morning we’ll be able to give you a good sense of where we’ve made progress and how we’re positioning the business for the long term.

So speaking of repetition, I’ve used this chart, which shows a 60 year look at

private residential investment as a percent of GDP, quite a bit. It provides a very rough indicator of where we are in the housing and home improvement market. At our last conference in the first quarter of 2007, we were at 5.1%, or 30 basis points above the 60 year average of 4.8%. Over the last year the market has corrected an additional 130 basis points, so we’re now considerably below the 60 year average and approaching the all time lows. On the same theme, we’ve seen a dramatic correction in sub-prime and Alt-A origination. We’re now well below the levels of 2005 and 2006, and in fact, below where we were in 2001. So a substantial correction has occurred. And again, we’ve had a lot of discussion internal and external on the impact of mortgage equity withdrawals on the home improvement market, we’re now back at 2001 levels.

This is not to say that we’re through the issues that have impacted the housing and

home improvement markets, far from it. You could put up almost any housing or home improvement indicator that you want, and it would be grim. We have record inventories of vacant homes, and that’s in the face of sharp production curtailments in the home building industry. Housing prices have gone from record appreciation to national declines. Mortgage credit has gone from historic availability to dramatic contraction. Foreclosure rates are at a record high. And as Carol will discuss, we see more negatives than positives for the remainder of this year, in particular, pressure on our consumers who are being affected by increased costs in fuel, food, and other essentials. So we see a continued difficult time in the housing and home improvement markets. But this just reinforces for us the importance of focusing on our existing stores, driving a limited number of important priorities, and carefully allocating our capital.


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Whatever the precise timing of the bottom of this market is, the long term fundamentals remain strong. The United States is still projected to add several million new households over the next five years. While the home ownership rate has declined somewhat, that still equates to nearly three million new households, plus our overall housing stock continues to get older. This will continue to drive the need for repairs. And I think we’re going to see new needs arise for our older homes, like energy conservation.

What I’d like to do in the next several minutes is give you an overview of where

Home Depot is on the path of creating shareholder value. This is a very simple chart that has four sets of activities. Focus on the core business, exercise disciplined capital allocation, increase return on existing assets, and build sustained competitive advantages. All of these are designed to maximize return on capital, which is our focus for driving shareholder value. Some of the activities are short term, some longer term, and as we go through the elements, I’ll give you my assessment of where we are on the timeline.

So our first step was to focus on the core, our retail business. The major steps

there are done, in particular the sale of HD Supply last summer. The other point of note on this chart is our home services business. We are in the process of refocusing that business, as Paul will discuss. It is not going to be an independent driver of growth for The Home Depot. This doesn’t mean that we’ll exit the business, but it does mean that we’re going to look at the business to drive connectivity to our core retail business. We’ve had a couple of great examples of that with our $199 whole house carpet install program, and our $89 whole house blind install program. It also means we’ll be less interested in growing the business than ensuring that we get it right. Without a doubt, our customers have a need for do-it-for-me solutions. But if we can’t effectively execute, we’ll be more interested in serving the pro who does it for our customer than in providing the service directly ourselves. We have also articulated and acted on a clear set of principals for capital allocation. As Carol will go through in more detail, we have financial guidelines for our existing stores, and we’re putting a higher hurdle in front of our new store growth, benchmarking our new store returns against share repurchases. To optimize our capital structure we’re in the midst of our recapitalization plan and remain committed to that as the business and credit markets stabilize.

I’d also say that there is an important day to day element here, and maybe

disciplined capital allocation sounds like too grand a concept. It’s more like stop doing stupid things. There are a lot of activities that a large organization like Home Depot does that are oriented more to the organization than to its customers or shareholders. That’s the activity that needs to be stopped, and the discipline around the capital allocation process was a very effective discovery tool for that.


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Where we focus most of our time is on our five priorities, associate engagements, store environment, product availability, product excitement, and own the pro. These are the same priorities as last year. They are very straightforward, and they’re designed to increase the return on our existing assets. In a world where we’ll be building significantly fewer new stores, we know that getting more out of our existing assets is our single most important objective. We’re confident that we have the right five priorities, in most part because they come directly from our customers. And we’re also confident that we’re making significant progress on them, even though at this point the increased financial returns aren’t there. Craig, Paul, and Mark will give you details on our progress.

Let me summarize what I see as some of the high points. On associate

engagement, we’ve done some important things over the last year, like improving associate compensation, recognition and reward programs, and adding master trade specialists to our stores. But I think what’s most important is our long term commitment to returning customer facing hours to the floor of the store. We’ve significantly de-leveraged our payroll as a percent to sales. But in the declining sales environment, that doesn’t translate to the number of hours we want to add for our customers. So we have to be more creative and disciplined. We have to find both additional hours and hours that we can reallocate to customer facing hours. In effect, we’re driving resource allocation using customer service as our benchmark. This is our Aprons on the Floor program, and Paul will discuss it with you in more detail.

On shopping environment, we’ve been able to make some immediate

improvements by increasing funding for maintenance and implementing store standards across the company. We’ve seen our voice of customer VOC stores on shopping environment go from 7.6 to over 8. We don’t need to have a store environment that’s like a Target, but our customers do want a clean and uncluttered store. And we’re clearly making progress on that.

On product availability, the major activity this year and next is the rollout of our

rapid deployment centers or RDCs. Mark is going to take you through that in detail. Again, the important overall point is that we’re committed to taking our supply chain from a competitive disadvantage to a competitive advantage.

On product excitement, Craig and his team are establishing the foundational

elements of a best in class merchandising team, from setting out basic internal processes to articulating the role and intent of our product categories, to providing the analytical and execution tools necessary to support the organization. We’ve made a lot of progress over the last year, but we’re still in the early stages. As you’ll hear from Carol, we expect to gain significant improvement in our operating margins through this merchandising transformation. We are, I believe, the only retailer anywhere near our size without basic portfolio planning tools,


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assortment maintenance tools, inventory planning tools, and centralized forecasting and replenishment tools. Our core retail effort is intended to address these deficiencies. But even without core retail, we can and are making significant improvement to our merchandising processes.

And finally, on our own the pro priority, the sale of the supply business has

actually helped the company focus. We’ve seen our bid room volume increase 200%, and we’re targeting our customer analytics on this key segment.

So where are we on the critical objective of building a sustained competitive

advantage? First, what are our key competitive advantages? The first three are directly based on the founding principals of the business, what we call the three legged stool, every day pricing, compelling assortment, and excellent customer service. We know that we have room to improve on these foundational elements. We became too promotional and perhaps confused our customers. And as is obvious from our Aprons on the Floor effort, we know we have additional work to do in improving customer service, both in the number of our associates and their training. So while our assortment is strong, we have opportunities particularly when it comes to regional variation. We know that our real estate is a competitive advantage. We have stores in areas of the country where it will be very difficult to site additional big boxes. As we take our new store count down, one of the positive side benefits is that we can focus our time and resources on those critical stores that drive enormous value for our shareholders. For example, we have more than 650 stores that are older than ten years, and these stores as a group are almost 20% more productive than the company average. We’re fortunate that we have the best brand in our space. What we need to do is now link that with best in class customer knowledge. That is our objective in developing a relationship with one of the premier companies in customer data insights, Dunn Humvee. As I said, we’re on the path of restructuring our supply chain, and we have shown that we know how to take our business model outside the United States. We are number one in Canada, and positively comp, we are number one in Mexico and have comp double-digit for the last 14 quarters. And as I mentioned on our first quarter earnings call, we are now seeing double digit positive comps in China. With Ricardo Saldivar and Annette Verschuren and their teams, we think we’ve built a competitive capability to take a great business model and successfully adapt it to new environments.

Finally, our most important competitive advantage is our culture. We have

passionate associates and a unique entrepreneurial spirit. The re-grounding of Home Depot in our culture is an ongoing effort. We’re farther ahead on this than I would have anticipated a year-and-a-half ago, but it’s still something we work on every day.


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So let me conclude this with a quick summary of 2008 and beyond. You’re familiar with this guidance which we gave at the start of the year. We’re now more comfortable at the low end of the guidance, since, as Carol will describe, we see more headwinds than tailwinds through the remainder of the year. To be honest, I had hoped when we scheduled this conference in June instead of February of this year that we would have a better near term line of site. But following the recovery of our market remains an exercise of uncertainty. A rough characterization, very rough characterization is that from the back half of 2006 through 2007 we saw the dramatic decline in housing construction. From mid 2007 on we saw the tightening in the credit markets, and that hit harder than expected. And now we’re facing into the combination of rising oil prices and declining home values. We’ll have a better understanding of these dynamics as we exit the next couple of months in the seasonal portion of our business. Once we’re through this, here’s what a normalized Home Depot looks like, what we look like when the current market conditions stabilize. Carol will go through this in some detail later. Without a doubt we have a lot of work to do to achieve this future outlook. And in particular, we need a positive sales environment. But I hope what you’ll leave here today with is a good sense of the progress we’ve already made, a good sense of how we’re improving the business for the long term, and the focus we have on making this outlook a reality.

Now let me introduce Craig Menear, our Executive Vice President of

Merchandise. Thank you. Craig: Thank you, Frank, and good morning, everyone. As Frank mentioned, we’re

committed as a leadership team to creating shareholder value by focusing on our core business, but with a disciplined approach. And what I’m going to talk to you about today is how my organization is supporting that effort and creating a best in class merchandising team. So first, I’ll share with you how we’re returning to the Home Depot merchandising roots that made us the leader in this industry. And second, how we are truly affecting change in how we run our business through our merchandising transformation. And finally, I’ll discuss with you the early good results that we’re seeing from the beginning stages of our merchandise transformation.

So the merchandising roots of Home Depot are found in some of the key

principals that you see here. First, the company was built on national brands. And particularly those that were important to our pro customers. Merchandising fought to get these brands in the building. I’ll talk more about brand strategy in just a minute. The key customer for the Home Depot was clear. We cultivated the DIY customer, along with the small repair remodel professional. And the products that we carried for these customers went through a filter process. First, it had to be essential to repair, remodel, or maintenance. Second, we needed to have the ability to be top of mind, and the ability to be the market leader. And finally, we


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had to be able to sell it profitably. And as I mentioned, products we carried needed to meet the needs of the pro customer. That was important because our DIY customers felt that by buying those goods, okay, they knew that they were getting a product that had quality and could get the job done. Now merchants spent a lot of time creating product knowledge opportunities to assist our associates in transferring knowledge to our customers. The company educated our DIY customers on how to complete projects and to this day, service is a very high expectation at The Home Depot. And finally, we aggressively attacked the market by offering great values every day.

Now the key element of our merchandising roots was our brand strategy. The

Home Depot has been built into a brand that carries a 94% unaided brand awareness. We are the leader in the home improvement industry in North America, and for that matter, the world. The foundation was the national brands, and they remain critically important today. Approximately 80% of our total sales still come from nationally branded product. And we don’t see that changing in any major way in the short term. And as a matter of fact, it will be our customers who ultimately determine the path of this change.

As The Home Depot became a brand itself, the addition of exclusive brands began

to provide the company with some key points of differentiation. Additionally, proprietary brands came into play. And the goal in mind here was to continue with the differentiation, but also to improve gross margin dollars. These brands were built largely through imports, leveraging the investments that the company had made in sourcing. The strategy going forward for Home Depot merchandising is to marry the best of our past with a more focused, disciplined approach going forward. We will remain focused on key national brands and we’ll add back where we have gaps. Our exclusive and proprietary brands still add value from a differentiation standpoint and gross margin. And I’ll share with you in just a minute just how powerful it can be when you put the right proprietary brand and The Home Depot together.

Our core customer is still the DIY customer and the small repair remodel pro.

And we are refocusing on these customers and beginning to eliminate those products that divert our focus from them. For example, we are eliminating this year pet food, automotive supplies, Halloween products, and apparel will go away in 2009. Our merchant teams are engaged again in helping to drive product knowledge in the aisles of our stores. First, we’re conducting merchant monthly walks where we have the opportunity to address key store management and department supervisors in the markets around the country. And this was a key activity from our past that is both a valued activity for our associates, as well as our merchant learning. We also have other various opportunities to drive knowledge, like road shows, weekly PKs, our website to assist in transferring product knowledge to our customers. And Home Depot merchandising is focused


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on providing great value to our customers every day. And we are getting more aggressive in this approach, but we will do it with discipline. And we’ll do it using the tools that are being built to support merchandising decisions.

Now in most categories where brand really matters, Home Depot carries the

number one consumer preferred brand. It would be hard to have a meaningful garden or plumbing department without the Scott’s or Kohler brands. GE is a powerful brand that focuses on leadership positions in any product category that they engage in with the customer. And we also carry brands that our pros ask for. For example, in power tools, DeWalt is a pretty important brand to our professional customer. And USG has the largest market share, approximately 30% of total gypsum sales in the United States. But we must do a better job of marketing the fact that we carry the preferred brands. And Frank Bifulco, our Chief Marketing Officer, and the team will be focused on driving this point with our customers.

This is also an opportunity to get brands back into The Home Depot. Warner

Ladders, for example, will be added back to our assortment, and this is a key brand that our professional customers expect to see in our stores. And it does carry the leading market share position.

Now when Home Depot works to create an exclusive brand for our channel

distribution, we do so with powerful partners. Exclusive partnerships that we have in many cases are the leading brands in their categories. Anderson Window is a leading preferred brand by professionals for wood windows. Home Depot offers the full access to the entire Anderson line for our customers. Behr Paint is the leading consumer paint brand in the country. Custom Building Products is the world leader in tile setting material, and it offers the only lifetime warranty for a project completed within their system. Ryobi has been a fast growing consumer brand in power tools for the past several years. This brand was introduced at The Home Depot with our DIY customers in mind. However, it’s offered such great value that now many professional customers are purchasing this product in our stores. And Thomasville was introduced for The Home Depot in our kitchen cabinet business. And here we leveraged this great furniture brand and today we carry that brand in flooring, which is a natural extension, as well as our new patio furniture line up that was introduced this spring, and we have had tremendous success.

So these are just some examples of the other types of exclusive offerings that we

bring to our customers. And the names that you see here are additional great brands found only at The Home Depot.

Now when you link Home Depot with quality product that brings innovation to

the marketplace under our own brand, the consumer responds positively. Home


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Depot has two proprietary brands, Hampton Bay and Husky, that exceed $1 billion in sales. Now I can remember walking with the management team at Proctor & Gamble, and it’s a big deal in that company when they get one of their brands to $1 billion. But think about the scope of Proctor & Gamble and who all they sell. The Home Depot has now grown two brands to that level, and we are the only place customers can buy those goods. That’s a powerful marketing opportunity. So the bottom line here is we’re getting back to our Home Depot merchandising roots.

Now let me talk to you about how we’re affecting true change in one end of our

business. As we get back to our roots of being an aggressive competitor in the market, we’re committed to do that with a disciplined approach. And this is where merchandising transformation, which Frank referenced, comes into play. There are three key areas where we are focused to make this happen. We are redefining how we operate our business by reviewing all of our processes and driving for greater efficiency and speed. Now this is going to take time, but the early progress is strong. This will be about a two year path to rewrite and retrain all of our merchants. And this documentation will make it much easier for us to integrate new talent into our merchandising organizations. Second, we’re committed to drive our focus bay approach. And I’ll give you a framework in just a minute, but remember, this is about the role and intent for each merchandising class. This adds clarity to our actions and speed to our decision making. This is really important as we drive for line structure improvements and continue to drive the project business. And lastly, we’re building tools to support the merchants in driving execution as we redefine how we’re running our business. The goal here is to make their lives easier and to enable faster decision making. The success from aligning people, process, and tools will be the long term enabler to delivering profitable sales and share gains in the market.

Now merchandising transformation starts by having the right people in place to

support these efforts. The average retail experience of our officer team in merchandising is 20 years. But we will continue to add to this base with the talent, both within the company and new talent from outside the company to blend new thinking into our process. Externally we have added Dave Roth(?) as our MVP over lumber. Gordy Erickson joined the team with a tremendous experience in home center, mass, and specialty retailing. And Frank Bifulco brings 30 years of brand management to marketing as the latest addition to our team.

Internally, we’ve focused on improving our connection with the field. First, the

leader in this area Bruce Merino, he was our Western Division President. And Bruce brings a wealth of field operating experience to the role. But he was also a merchant for many, many years with our company. We added divisional sales managers in the field who are responsible to provide key regional input to the Atlanta merchandising team. Other key roles in merchandising leadership were


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filled with high performing operations partners that have shown strong talent for merchandising. And just last month we added the role of Vice President of Store Environment. And this position was filled with one of our top performing RVPs that has a very strong record of execution and merchandising talent.

And finally, one of the most significant changes that we’ve made with people is

the development of our new merchandising execution team, which falls under Bruce’s organization. Here, we developed an internal service organization that drives merchandising execution for the stores. These teams drive various sales initiatives, they drive merchandising product to the rate of sale, they ensure that programs get set properly, and they provide product knowledge and make sure it’s conducted. This program was launched in our garden department this spring. And it was probably one of the best executions of our seasonal spring business in the past ten years.

Our objective in transforming process is to drive greater speed and efficiency.

And as I mentioned, this will take about two years to redefine every process that we use in merchandising. Initially, we’re driving the implementation of our focus bay approach, and working on a significant improvement in our seasonal planning processes. This year we changed our work week for the merchandising team to put real focus on better understanding what our customers’ needs are, and better linkage with our partners in operations and supply chain. Merchants are back in the stores one day a week talking with our stores, talking with our customers to understand how we improve our assortment to meet their needs.

We’ve also completely changed our weekly meeting cadence to foster

significantly improved communication and forecasting within the business. These efforts are helping us with our focus bay approach, our seasonal planning, and improving our merchandise presentations.

Now one process that’s critical to our merchandising transformation is our focus

bay approach. And let me take just a minute to review the strategy behind this focus bay approach. Again, it’s defining the role and intent for each merchandising class that we carry. We cannot invest in all equally, so how do you apply your investments to project the image that you want to your customers? Additionally, this process defines tactics that you use for assortment, price, space, marketing, service, all in an effort to make decisions faster and to align with your overall strategy. So the roles that we have identified are destination, core, traffic, impulse, and emerging. And as an example, let me walk you through kind of the high level concepts of what a core class is. From an assortment standpoint, it would be complimentary and competitive. From a location and space, we would co-locate these products with destination or project starter goods. Service, we expect consistent service or it would be a solution selling opportunity. Marketing will be fairly consistent, and our key focus would be to market the breadth of the


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assortment. And we also have differentiated strategies on price as part of this focus bay approach.

Now the focus bay approach is really at the heart of our changing business model.

We no longer are about new store growth, we’re about driving productivity in the assets that we deploy. There are roughly 85,000 square feet, or 800 bays of selling space in a typical Home Depot store. And we need to be driving for productivity gains in each of these bays. Some may be completely focused on top line, while others will be focused on driving average ticket and gross margin dollar productivity.

The example that you see here is our commercial electric builders lighting

program. Frankly, this was an assortment gap identified, which we filled with this new lighting program. One category had to shrink in space to provide room for this new product to go into our stores. This was done in about a 90 day period of time once we started our resets. And the productivity in these bays has increased 60% from what was in them previously. Now that’s the type of work that needs to be completed on an ongoing basis across the store.

There’s times when we can achieve this with a complete product line change out,

like I’ve described here, and there’s other times where we can make that happen with simple SKU changes within a bay. And as we affect change in how we operate our business, the seasonal category is one that we can look to as an example of how this is impacting the way we manage our business. This truly is about aligning people, process, and systems to drive substantial improvements in the management of the business. We knew that there were several enhancements that we had to make in our seasonal business to drive both sales and profit productivity. We had to assort closer to the customer, we had to get below market level to the store. We had opportunities that we had to fix in terms of information flow, both internally and externally because this business moves incredibly fast. We had to improve our in stock positions. And to do that, we had to be much faster about responding to the time in terms of demand needs. And in doing so, we had to enhance the return on the inventory investment that we made in these categories.

Now, let me give you an example of how we’re leveraging our merchants in the

field with our Atlanta office to better assort and present product and address the customer preferences regionally. So what you see here is an example of a tile reset that’s actually going on across the country right now. Markets are now assigned to one of nine tile zones. And each zone’s assortments will vary based on size and format, regional design and style, and market appropriate price points. And as we think about presentation, we’ll keep in mind that Home Depot is an operating warehouse, and we will focus our merchandising presentations to fit


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that model. Our main priorities will be to simplify the shopping experience to a customer, increase holding capacity, and to reduce clutter in our bays.

The last part of our transformation involves systems. Once we get the people and

process in place, we have to support the operation of the business with new tools to improve what we’ve created. The team has delivered several new tools, four of which you see here. These tools are delivering advanced capabilities that we need to make change stick. However, we’re in the very early implementation stages of this across our business. The assortment maintenance tool allows our merchants to get below that market level, but it also provides exception reporting against their plan. So this not only gets to better assortment planning, but it simplifies the management of the process as well. Enhanced forecasting tools were put in place providing greater visibility into the business and they’ve changed really how we work cross functionally in managing these businesses. Our new math event tool drives our merchandising plans to the store, and the MST platform is a communication tool between our stores and the FSE. Now these tools are examples of how we’re making it easier for merchants to react to the specific needs of a regional area. All of this combined is how we’re transforming our merchandise approach.

So let me share with you some good traction that we’re feeling early in the

implementations of our merchandising transformation, and I’m only going to call out a couple of them here. First, as you recall, one of our key measurements to our success was to improve market share. And that process has begun. We have share gains happening in half of our merchandising departments. In addition, our industry has gotten pretty promotional over the past several years. However, we’ve learned that numerous promotions were not providing lift, and therefore, we’re reducing unproductive promotions. We’ve been able to hold sales volume while optimizing gross margin dollar productivity. And lastly, when I stepped into this roll in 2007, our website was completely disconnected from our business. Since then, we’ve made a lot of progress on getting it more integrated with the core home improvement business. And this is an important activity as our customer changes how they shop and research product.

Now let me share with you more granularly an example of what happens when

you align people, processes, and systems. Our first quarter results in garden were exactly the kind of results that we want. Our sales grew positively year-over-year, but our gross margin dollars grew at a rate of almost two times sales, while inventory was down significantly. The net result was a positive lift in our _____. We drove more gross margin dollars for every dollar that we invested in this business.

So I’ll wrap up by sharing with you how we’re thinking about sustaining sales and

gross margin productivity over the long term. First, the productivity that we’ve


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enjoyed this year has really come from two key things, a more rational view of promotions, and really returning to providing greater value to our customers every single day. Second, it’s going to be about improving seasonal inventory management and utilizing the enhancements that I’ve described here today. Short term, the improvements will come from our focus bay approach, driving the project business, and continuing to improve our line structures. And then the long term sustainability will come from full implementation of our merchandising transformation, supply chain benefits, and then really developing and understanding of our customers’ needs which will allow for effective solutions in driving sales to The Home Depot.

I thank you very much, and now I’d like to turn it over to Mark Holyfield, our

Senior Vice President of Supply Chain. Mark: Thank you, Craig, and good morning, everyone. I’d like to give you an update on

our supply chain transformation here at The Home Depot. One of our five key priorities introduced in last year’s investor conference was to improve our product availability for our customers. And as we sought to deliver on that priority, our focus turned quickly to our supply chain. Last year I talked about opportunities to improve our supply chain, particularly in the areas of central distribution and our inventory management. And I’m pleased to have the opportunity to give you an update today on our progress.

Last year we talked about product availability, improving our in-stock for the

customer. We’ve made progress against that, according to both our internal and our external measures. We talked about improving our inventory management capabilities. We have put in place a number of improvements, including better merchandise financial planning, better seasonal planning, like Craig talked about, a more effective inventory management organization, and improved systems. We said we would develop an end state distribution network model. We have completed that model and have begun to migrate to it following it as our plan going forward. That model and optimal flow network called for increased central distribution to optimize our flow of goods and we’re moving to that network now. As Frank mentioned, we have begun an aggressive rollout of RDCs, or rapid deployment centers, and have three facilities live today.

But let’s back up for a moment and review why it’s important to optimize the

flow of goods. A well configured and operated retail supply chain creates great value in that retailer. And one doesn’t have to look too far to find examples of retailers who have differentiated their results from their peers by strategic investment and great execution in their supply chain. Wal-Mart, Tesco, Best Buy, and Publix Supermarkets are some of those companies that quickly come to mind. These retailers have the following in common, a differentiated supply chain strategy connected to their company’s customer value proposition, a well-


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configured DC network, state of the art systems and processes, and excellence in execution. In every case, their supply chains deliver high end stock levels, optimized inventory management, and low logistics costs, all key deliverables for a retail supply chain.

But a retail supply chain does more than this. It simplifies store operations,

creating more hours on the floor for associate engagement with customers. It supports product excitement through faster speed to market for new and innovative products. It creates a better shopping experience by reducing excess inventory and promoting a clean and uncluttered store. And it supports the retailer’s customer segmentation efforts through enabling support for specific customer needs, as in our case, the pro customer, where job lot quantities are critically important. In short, a good retail supply chain creates this optimal flow network.

Of course, one of the most visible indications of whether you’re flowing goods

properly is the in-stock position on the shelf in the store. And despite years of research and effort, this issue continues to plague retail supply chains, including ours. Leading studies of retail product availability indicate that up to 4% of retail sales are lost due to out of stocks. And these studies also indicate that a limited number of root causes are the drivers of those out of stocks and Home Depot is no different than that. In some cases, customer facing out-of-stocks are caused when product is in the store but not on the shelf. Sometimes not enough is ordered due to poor process or faulty forecasting. In some cases inventory counts are not quite right and the replenishment systems think the product is in stock when in fact it’s not. And finally, in some case, enough product was ordered, but it was not shipped on time by the vendor or filled complete by the vendor, or not transported on time by the freight carrier, or not received on time by the receiving location. That last one, late or insufficiently filled purchase orders is the number one root cause of out-of-stocks at The Home Depot. The pipeline from origin to store does not get the freight there on time and complete far too often. So great opportunity lies in improving the performance of our supply chain in landing freight at our stores on time and complete.

Another deliverable of optimal flow is good inventory management. This means

carrying the right level of inventory to be in stock for the customer, but at the same time managing inventory responsibly to improve working capital. This chart shows the history of inventory turnover at The Home Depot for the last ten years. The scale on the left is inventory turns, and the scale on the right is average store sales volume in millions. As you can see, our inventory turnover performance has generally tracked right along with the decline in average sales per stores, and has not delivered inventory turnover results commensurate with other leading retailers. This is in part a result of a supply chain that worked pretty well for high volume stores, but those same strategies and tactics, a one-size-fits-all approach if


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you will, do not play well for lower volume stores. Our high volume stores have no trouble making frequent orders to vendors for direct store delivery with sufficient volume to allow them good in stocks and inventory turnover. But in lower volume stores without an effective central distribution network, we are forced every day to make the tough choice of being out of stock or overstocked due to vendor minimum order quantities, long lead times, and unreliable replenishment. Keep in mind that for every one-tenth improvement in inventory turns, we free up $150 million in cash flow. So the opportunity is immense when we reverse the direction of that inventory turnover line.

Let’s review for a moment the existing Home Depot supply chain. And this chart

is very similar to one we showed at last year’s conference. On the left are the sources of goods we sell, on the right are our stores, and in the middle are the channels of distribution we use at Home Depot. Taking a look at our existing distribution network once again, we have five basic channels for product to get to our stores. Starting at the top, lumber and other bulk goods are processed through our lumber DCs. Next, we have the import DCs and carton DCs. These DCs are traditional stock and pick warehouses. Together, these DCs account for about 20% of our product flow. Now fourth in line there you see the transit facilities, or TFs. While they handle about 20% of our freight, they are not really distribution centers and simply pass through individual store orders across their docks on their way to stores. They don’t help us eliminate those vendor minimums, they don’t help us identify shipment shortages, and they don’t move freight particularly quickly. Finally, you can see that about 60% of our freight still moves direct to store. And this is absolutely the right answer for those things where we sell a full truckload per week in a store. But it’s absolutely the wrong answer where a vendor minimum shipment quantity is way more than a single store needs on a weekly basis.

Now that we’ve opened these lower volume stores, it’s become even more

challenging to make these vendor minimums. So our current supply chain, with its limited capability and one-size-fits-all approach limits our ability to achieve the priority of product availability with optimal inventory. In summary, we have too many out of stocks, we have too much inventory, and we spend too much time having to handle freight in our stores instead of serving our customers better. From a competitive perspective, our supply chain has become more of a competitive disadvantage than an advantage.

So how do we get to parity, and how do we get further to a competitive advantage

for product availability and supply chain for The Home Depot? By moving to a rapid, an optimal flow network that optimizes the flow of goods based on their characteristics. Consider the various types of products that we sell in The Home Depot. Some products make most sense to go direct to store. These would be products where full truckload is the weekly demand in the store, where the


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transportation costs are relatively high as a percent of sales dollars, and where the value of the product is relatively low, eliminating inventory carrying costs as a factor. Examples might be concrete, bagged fertilizer in season, mulch, pine straw. But some other products make the most sense to flow through a DC very rapidly. These would be relatively faster movers of moderate value. Demand and supply of these items are relatively predictable, especially when considered at the regional level. These are products, these are most of the products that we sell, therefore, a rapid deployment center based network is optimal for The Home Depot. Finally, some products are relatively slower moving making demand less predictable. Some products have relatively high value, making inventory carrying costs in the store high. Some products may have an exceptionally long supply chain, like imports, making supply relatively harder to predict accurately. These products lend themselves to traditional stock and pick warehousing to optimize their inventory carrying and handling costs.

So determining optimal flow for a given type of product is based on several

factors, the value of the goods, their handling characteristics, the predictability of demand, the reliability of supply, their origin point, and other factors. And the secret to developing a good retail distribution network model is understanding the interaction of these characteristics and creating the optimal flow network to move product to stores.

As I mentioned earlier, in 2007, we used information about our product flows to

develop an optimal distribution network model. This distribution network strategy effort employed industry standard techniques to map and analyze all of our existing and forecasted network product flows all the way upstream from our suppliers and downstream to our stores and customers. And through this effort, we developed an optimal flow distribution network strategy that we will use to guide all of our network development decisions for the future. Included in these results were distribution locations and sizes and a transition plan on how to get there.

Our review led to a revised network design, as indicated here on this chart. The

optimal flow network for Home Depot looks like this. It’s simpler, it’s more comprehensive in its service capabilities than today. Similar to the existing network, this network includes capability to handle lumber and bulk products. It does call for stock and pick DCs where products are stocked and replenished to stores on demand. But it also includes RDCs, or rapid deployment centers, for fast flow movement of goods to stores. The RDC is the primary engine and the new link in the chain, which will get us to the optimal flow of goods. Note that this model includes moving from a central distribution penetration of about 20% of product flow in the existing supply chain measured by cost of goods sold to about 75% of product flow. The optimal DC network would include more than 20 of these fast flow RDC facilities, and ideally more volume would pass through these


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fast flow RDCs than through the stocking DCs. So the biggest opportunity in front of us is to quickly rollout these RDCs and being to close the gap from 20% of central distribution flow to 75%.

Along those lines, in 2007, we piloted one of these RDCs in Braselton, Georgia.

So how does this work? A single RDC is designed to handle an area of about 100 stores and their volume. On the left you have these stores’ demand aggregated into a single purchase order from the supplier to the RDC. The supplier prepares the RDC order for shipment in bulk quantities and applies a standardized label to the pallet, coupled with an electronic shipping notice to the RDC. Note that these RDC level orders are much bulkier than individual store orders and require less time and effort to prepare on the vendor’s part. They are also much more efficient to ship, as they are more neatly packed in full or near full pallets. These product pallets are then shipped from the supplier to the RDC. At the RDC, the product is unloaded, the standardized bar code labels are scanned, and product is detail received against the supplier’s shipping order. It’s then sorted to the desired store location and merged with product from other vendors destined for the same store. Note that the product is allocated to individual stores upon receipt, and this postponement of the allocation decision leads to a much higher quality decision, as it has the benefit of several more days of information regarding sales and inventory at an individual store level. The product is then shipped to the store in well utilized pallets with a license plate on each pallet that identifies for the store what is contained on that pallet. This is the process that we piloted in Braselton, Georgia, in 2007. The results of this RDC pilot were better in stock at the stores, reduced lead times, improved shipment integrity, and improved inventory turnover. The concept works.

Now some of you who have followed us for a while are familiar with our transit

facility network and have questions on how an RDC differs from a transit facility. First, the RDC eliminates vendor minimums. The transit facility handles only store level shipments, which are subject those vendor minimum shipment quantities. The RDC makes a bulk order to the vendor, ensuring an efficient quantity for each purchase order. The RDC eliminates 99% of purchase orders, as when we issue one purchase order per RDC in a 100 store RDC it reduces the number of purchase orders by 99 for that vendor. This is a huge savings for our suppliers and for The Home Depot, as each order requires overhead to handle. The RDC picks in a bulk pick, while the transit facility’s individual store orders often result in a very inefficient pallet quantity. And because the RDC aggregates demand for about 100 stores and uses the cubic feet in a transport trailer far better, it allows for full truckload shipments, as opposed to more expensive less than truckload shipments, or even partial shipments direct to the store.

Through postponement, the RDC takes lead time out of the process so that we can

be much more aligned with what product needs to be where and when. Because


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transit facilities only pass through a pre-selected shipment ordered days ago from the supplier to the store, there’s no opportunity to improve the deployment decision based upon new sales and inventory information. So the RDC has a number of advantages over the transit facility, and it’s the cornerstone of our optimal flow network.

As that cornerstone, that RDC is the logical place to start the migration. And there

are several factors that have made RDC the focus. Simply, it represents the fastest speed to value for Home Depot. It provides an immediate scalable solution to aggregate orders and improve our in-stocks. In the optimal network model we found that 60% of the value is driven by the RDC platform. RDCs are a relatively low capital investment, far cheaper and simpler to set up than traditional large box stock and pick DCs. And because product does not sit in these centers or get put away, they have lower operating costs. So you can see that the biggest value driver for The Home Depot within the new optimal flow network are these RDCs.

So let’s review our progress so far in setting up this network. Starting in April,

2007, the first pilot facility included 67 Atlanta area stores and about 20 vendors, converting part of an existing Home Depot operated distribution center in Braselton, as I mentioned, to these fast flow or RDC capabilities. And again, the results of the RDC pilot were better in stock at the stores, reduced lead times, improved shipment integrity, and improved inventory turnover. We ramped up more stores and more vendors, and today the Atlanta area RDC serves 99 stores and processes about 150 Home Depot vendors’ products through it. And we continue to add vendors to that mix weekly. Our second RDC was opened in Chicago in January. When we open an RDC is accompanied by the closing of the associated transit facility in the area, and the incorporation of those existing processes and freight flows into the new RDC. Our third RDC was opened in Dallas in March. Dallas was the largest and most challenging opening to date by far, and we had our share of start up issues. With each successive opening we have learned new things about the model and the process. We solve and put the issues behind us, and we adjust the strategy and tactics accordingly. To achieve the greatest speed to value, we are opening more facilities at a very rapid pace. This is no doubt one of the largest supply chain transformations ever in retail, with one of the most aggressive timelines ever. And with any major transformation you will encounter bumps in the road. We know this, and we prepare for this. As I said, with each successive opening, we improve the process. We remain on target to rollout our RDC strategy this year and into the future.

The keys to gaining speed to value are getting more RDC buildings open and

operating effectively and on boarding vendors to the program. Regarding vendor on boarding, our target is to complete 2008 and enter 2009 with 30% of RDC served stores’ product flow measured in cost of goods sold on the RDC program. And at this point we are approaching 22% of COGS on board the RDC program


June 5, 2008

for those stores with more added each week. So we’re on target to get to 30% of COGS for served stores by the end of 2008. Beyond 2008, we will continue to open RDCs until we have reached 100% of our U.S. stores. We will also continue to ramp up vendors through the RDCs, making progress towards that end state goal of 75% central distribution. Now keep in mind that the 75% distribution target includes the existing lumber DCs and the traditional stock and pick DCs. We expect to completely our RDC rollout in 2010.

We expect considerable benefit from our supply chain initiatives. We expect

improved in-stock and improved inventory turnover. We also expect lower overall logistics costs. Since our logistics costs show up in our gross margin lines, that’s where the benefits will be most apparent. By 2011, we expect to gain approximately 20 to 30 basis points of benefits. Post 2011, we expect to get to as much as 30 to 40 basis points of benefits. We also expect that our supply chain initiatives will contribute to a one full turn improvement in inventory turnover over time. This will correspond to freeing up $1.5 billion of working capital.

In the end, we’re convinced that our optimal flow network and other supply chain

improvements will lead to great benefit for our customers and our shareholders, simplified store operations leading to better customer service, more product excitement through faster speed to market, and enhanced shopping experience with reduced excess inventory in the stores. And finally, a differentiated customer experience all around enabled by our migration to the optimal flow network. Thank you.

Speaker: Okay, ladies and gentlemen, we’ll now take a 20 minute break, we will resume

our conference at 9:30. BREAK Speaker: Welcome back. Hope you had a great break. So please turn off your cell phones

and put your BlackBerries away. And yes, the market is open now. Before I invite our next presenter up, I do want to take a little time to do something a little unusual and that is before the end of the meeting I actually want to thank several colleagues for helping to put this conference together while at the same time we released earnings and at the same time we had our shareholders’ meeting -- and I could go on -- all this in three weeks. So I just wanted to thank my team, Isabelle, Darrell, Tiffany, Megan and Tammy, the Investor Relations team. And also thanks to the Communications team, Laurie, Julian and Mike. You definitely all made it happen.

Now, let me introduce our next speaker, Paul Raines, Executive Vice President of

the U.S. stores.


June 5, 2008

Paul: Thank you, Diane and good morning, everyone. Today I’m going to share with you what we are going to focus on from a store operations perspective. As Frank showed you, customer service is integral to who we are. The customer is our top priority and every action we take revolves around improving the customer experience. Critical to our success is a commitment to service to understand our customers and our competitive positioning in the marketplace.

Let me take a minute to discuss these in greater detail. First, to improve customer

service we know we have to have skilled, knowledgeable labor in our stores. This is a multi-year initiative to add more ours on the floor through better expense allocation. Second is ensuring that we’re competing effectively in the marketplace, which includes evaluating the quality of our in home installation services and marrying them to the correct products through cooperation with our merchant team. Third, we are committed to better understanding our customers, especially our pro and multi-cultural customers to provide them the right services and products.

The fundamental to improving customer service is having trained and qualified

associates on the sales floor. We’ve been at this a long time and there is an art and a science to this. This is the science portion.

Home Depot invented engineered labor studies for the home improvement

industry back in 1979. As a result of these studies we set labor standards that the company used throughout the 1990s. By 2005, we knew we needed to reevaluate our labor needs and began systematically collecting new labor information across all departments and varying store volumes. We have begun to use this information in a comprehensive effort to set new labor standards.

We’ve conducted thousands of labor studies over the past few years. I’ve

highlighted an example of what we’ve learned through this work in our plumbing department. In any given week, approximately 52 percent of the labor in plumbing is spent taking care of customers, including helping customers in the aisles and answering customer phone calls. The other 48 percent of the labor is spent on tasking, including packing down product in the aisles, training and general maintenance. This helps us understand how to best staff the department to create the right experience for our customers. As we seek out opportunities to improve our customer service, this data allows us to focus on eliminating operational tasks to fund labor initiatives.

As we think about the future, it will be difficult to add incremental expense to

fund additional labor in stores. What is important to know is that we are implementing our new labor standards through better allocation of our operating expenses. While total operating expenses should remain flat, the mix within


June 5, 2008

expenses should change so that we are spending more on payroll and less on other non-customer facing expenses.

This brings us to our Aprons on the Floor initiative. Aprons on the Floor is geared

at investing in our stores by adding more selling hours to the floor through better expense allocation. Our goal in 2008 is to reallocate $180 million. We also understand that when it comes to customer service it’s just as much about quality as it is about quantity. There are several areas where we have redeployed resources. Let me take you through a few of the more significant changes we have made.

Based on a recommendation from our field teams in February, we rolled out our

day freight initiative to over 1,100 stores. The purpose of this was twofold, to increase associate availability during our peak selling hours and provide more ownership of inventory management to our department supervisors. This initiative changed our receiving and recovery time from overnight to early morning and evening shifts to allow us to have more associates on the floor assisting customers. Now this was heavy lifting but we were able to accomplish it with little noise because of the personal involvement of the field team.

We also closed three call centers in the first quarter, reinvesting the savings into

store payroll. During the past five years the Home Depot has standardized and institutionalized our human resources function across the organization. In April, we told you that we were going to restructure our field human resources function. And as of May 1, we replaced our in-store human resources managers with district-based human resources teams. The savings generated by this restructuring were reinvested in store labor.

Sometimes we need to restructure to reinvest. We are committed to prudently

managing our expenses and taking action where we can to hit our $180 million goal to reinvest in associates. Keep in mind that this is a multi-year initiative. We’re committed to continuing our efforts in reallocating our expenses to get more selling hours on the floor.

As you know, we have taken steps in the past year to refocus our training efforts

back to hands-on, in the aisle learning. In the first quarter we introduced a product knowledge badge. This new badge rewards associates through cash compensation for completing 100 percent of the product knowledge training in their departments and adjacent departments. Associates that complete this training are better able to help our customers with projects that cut across multiple product categories.

Before an associate can be awarded a certified or expert level badge, the associate

has to demonstrate in the aisle knowledge about products, carry out department


June 5, 2008

functions such as cutting and threading pipe or using saws and must be able to readily find product in their department.

Our associates are reacting positively to our investments in them and the changes

they are seeing and this is good for our customers. We know taking care of our customers and each other by investing in our stores and associates is the right thing to do. Our voluntary turnover continues to decline at a double digit rate year-over-year and our store associate tenure continues to increase.

We are also making foundational investments to make our customer experience

better. As most of you know, the average age of our stores is around eight years old, a time when you really need to refurbish the store to continue to drive sales. We adopted a programmatic approach to maintenance in 2006 and since then we have touched all of our stores. We restriped our parking lots, spiffed and polished 898 floors and installed T5 lighting in nearly every store. We will continue to spend significantly more in 2008 than the historical trend.

We launched the store standards initiative in fall of 2007. The objective was to

create a more consistent shopping experience across our stores with a focus on decluttering our aisles and making the store easier to navigate. As a result of our foundational investments, we are seeing results. We track customer sentiment through our Voice of the Customer Survey where we hear from more than 115,000 customers a week. Clear and uncluttered, which corresponds to shopping environment, has continued to improve year-over-year.

Home Services continues to be an important part of our business. Over the past

year, we have focused on improving the quality of our installation programs. We do approximately 10,000 installs per day and about 99 percent of our jobs are completed without issues. We know we are making progress because we reduced our customer complaint rate.

We exited programs that were unproductive such as home security, irrigation and

putting greens. And we integrated Home Services more closely with core operations and merchandising to drive greater alignment.

The pro customer is very important to us. They represent about 30 percent of

customers in our stores. We directly service only 28 percent of those pro customers in our store through our commercial credit and managed account programs. We also know that the remaining 73 percent of pro customers shop our stores but they don’t use any of our pro services and this represents a big opportunity for us.


June 5, 2008

This year we will focus on better servicing our pro customers and those 73 percent under-served pros. We now have the customer insights we need to provide our pros the products and services they are looking for.

As you know, we have been working for some time with Dunnhumby to better

understand our customers. And I’m pleased to inform you that we have now broadened that approach to focus and drill down on our pro customers. Working with our Dunnhumby partners, we have studied and visited the highly successful cases of Tesco in the U.K. and Kroger in Cincinnati. These companies have demonstrated success in building customer loyalty through insight and better knowledge of customer behavior. The time we have spent with those organizations has helped us understand the challenges and benefits of deep customer insights.

We asked Dunnhumby to assist us in developing a working model of the pros’

buying habits and behaviors. In order to develop the pro model we leveraged all our sources of data, including credit, our managed account list and our SIC segmentation and even our Voice of Customer Survey responses. We also identified behaviors of pros such as types of products or days and hours they prefer to shop. Using statistical modeling, we flagged our pro transactions to separate them from the overall consumer base.

In this process we have found it important to develop a pro model that goes

beyond just looking at spending as pros run the gamut from super-premium to uncommitted. We have validated our model by comparing it to our known managed account list, giving us confidence that we are identifying the right types of customers. Finally, we use the model to understand product categories and SKUs shopped by pros in detail.

How will we know we are successful in driving from our pro strategy? Using the

model we will measure the four Rs. We’ll measure Reach through pro penetration; Results through sales; Return through sales per pro customer; and Relevancy through adjacent departmental sales.

As we’ve segmented the pro spend, we are able to identify what they are buying.

By mapping these items on a scale of portion of spend and frequency of purchase, we can identify leadership SKUs that are critical. The top side box on the chart represents merchandise that we should stock in deep quantities, the right assortment and competitively priced.

There is big value on using data on customer behavior to drive our product

decisions and we learned from our Tesco and Kroger work that our conventional wisdom can be flawed when viewed through the filter of customer data. And


June 5, 2008

merchandising and pro teams will use this data to create strategies to drive our pro business on a category-by-category basis.

In addition to better understanding our pro customers, we’re taking some very

exciting actions to ensure we’re serving all our multi-cultural customers well. For example, take the Hispanic community. The Hispanic population is growing at a rate almost three percent faster than the general population and 14 percent of households will be Hispanic by 2010 in the United States. Hispanic purchasing power is growing at a faster rate than the average and buying power is expect to surpass $1 trillion by 2010. Lastly, over the next 15 years Hispanics will represent 20 percent of total home ownership growth.

First I’d like to share two Hispanic ads that are running in the U.S. Spanish media

today. Then I will close by talking more about what we are doing to target this important customer. Can we roll the ads please?

[VIDEO] Paul: To better service these customers we have done a number of things. We have

established a bilingual staffing goal to mirror our customer base in stores with a greater proportion of Hispanics. We have rolled out bilingual signage to most stores and we have integrated our Chief Diversity Officer and Vice President of Multi-Cultural Merchandising with our stores team to develop integrated human resource, merchandising, marketing and operations plans.

We also have developed a scorecard to track progress against key metrics,

including the percentage of bilingual associates and Voice to the Customer results. We are working on developing special merchandising and marketing programs, including partnering with our Mexico stores to identify brand opportunities and expanding the [Spanish] _____ programs with Bear(?).

As an example, this is one of the [Spanish] _____ ads reflecting our Hispanic

color pallet. We used descriptive names that resonate with the Hispanic community such as [Spanish] _____ and the one you see on the screen, [Spanish] _____, which means clay pot.

We know we are taking the correct actions as we have already seen improvement

in the first quarter. We have 86 percent unaided brand awareness from U.S. Hispanic homeowners and our share of wallet increased to 34 percent of home improvement spent.

Home Depot has long been the leader in Hispanic markets for home improvement

and when we say Puedes hacerlo, podemos ayudarte, we take it seriously. [Spanish] _____. In Spanish that means we know the Hispanic customer well.


June 5, 2008

We know 2008 is going to be a difficult year. Ultimately we will succeed if we

provide great customer service. We remain committed to executing the fundamentals, our key priorities and to investing in our associates and customers.

Now let me introduce our CFO and Executive Vice President of Corporate

Services, Carol Tome. Carol: Thank you, Paul and hello everyone. It’s so nice to see so many familiar faces.

This morning my partners shared with you the progress that we’re making against our key priorities and how we are positioning the company for the long-term.

What I’d like to do is tie it all together and show how our actions should create

value for our investors. Today, I plan to cover five key topics. First, quickly review some highlights through 2008; second, discuss our approach to driving capital efficiency; third, provide you with an update on our private label credit card program; fourth, share with you our thoughts on normalized earnings and operating targets; and then wrap it up by revisiting our investor return principles.

So let’s start by taking a quick look at our first quarter results. We’re all very

familiar with our first quarter results. They reflect a challenging macro environment with sales down 3.4 percent from last year and a year-over-year decline in our operating margin of almost 500 basis points. This reflects the impact of a $543 million charge we took related to our store rationalization decision.

Excluding the store rationalization charge, our operating margin declined by 192

basis points to 7.1 percent. On an adjusted basis, our earnings per share from continuing operations were $0.41 and in line with our expectations.

We had positive comp sales in Canada, Mexico and China. But our business

across the United States was soft, with each state reporting negative comp sales. Six of our top 40 markets, however, were positive and those markets were found in Texas and the Ohio Valley. Parts of Florida and California remained weak with double digit negative comps. We highlight Florida and California because those two states make up 23 percent of our total sales

April, May and June are critical selling months for us. April and May are now

behind us and we are in the midst of our seasonal business. Given the calendar shift and the seasonal nature of our business, we expect the second quarter to be our lowest comping quarter for the year. May came in on our expectations. But as we look out we see more headwinds than tailwinds for the balance of 2008.


June 5, 2008

Headwinds include commodity price pressures, U.S. dollar depreciation, rising fuel costs, pressure on the consumer and continued housing softness. Now the economic stimulus checks are just starting to reach homes. So that could provide some tailwinds and we do start to lapse(?) easier comparisons in the fall.

This is just an uncertain time for us. The guidance we set forth at the beginning of

this year is shown on the right side of this chart. At this point we’re more comfortable with the low end of our guidance, which is sales down five percent and earnings per share from continuing operations down 24 percent.

Now turning to our 2008 capital plan, at the beginning of the year we planned to

spend $2.3 billion. Given our recent store rationalization announcements, our 2008 capital spending plan is now $2.2 billion. On this chart we give you a breakdown of capital spending. This year about $1 billion for new stores, $580 million for our existing U.S. retail stores, $118 million for supply chain, $265 million for IT and the remaining budget is for international and capital use at our store support center. In total, our 2008 projected capital spending is down $1.2 billion from what we spent in 2007, principally in the area of new stores. Additionally, our spending in our existing U.S. retail stores is down about $200 million from last year.

Now a couple of points about spending in our U.S. stores. This bucket of

spending includes maintenance, merchandising and operations spending. This is capital spending that supports activities inside our store to improve the overall shopping experience. In 2007, we had some catch up spending that we didn’t need to repeat in 2008. We’re also smarter about how we spend capital inside our stores. You’ve heard us talk about big remodel projects in the past. Those projects do not provide adequate returns and are not necessary as long as we maintain our stores, which we’re doing. On a go forward basis, you should expect to see us spend a minimum of $600 million each year on our existing stores.

We continue to generate solid cash flow from the business, despite the

challenging sales environment. We believe that our cash flow from the business will be sufficient to fund our capital spending and dividend plans. We like to have between $500 million and $1 billion of cash at all times. And we use our commercial paper program to fund seasonal peaks and valleys in our cash position.

At year-end we had $1.75 billion in outstanding CP. That was reduced to

approximately $500 million at the end of the first quarter. As an A2P2 issuer, we have solid access to liquidity at a very low cost. Our commercial paper spreads are about 38 basis points over LIBOR.


June 5, 2008

Now on this chart we highlight our capital structure as of the end of the first quarter. A few things to note: First, the average pre-tax coupon on our debt portfolio is five percent and on a swap adjusted basis it’s 4.8 percent. We have staggered maturities across 28 years and the average maturity of the portfolio is 11 years. $282 million of outstanding indebtedness comes due in 2008, which we plan to repay using internally generated cash.

We use a cash flow metric of adjusted debt to EBITDAR as the governor for how

much debt we will employ as a company. Our targeted adjusted debt to EBITDAR ratio is 2.5 times and as of the end of the first quarter on a trailing 12 month basis the ratio stood at 2.1 times.

Now moving to a discussion of our approach to capital efficiency, our focus over

the past 1.5 years has been on delivering a superior capital efficiency and cash flow. It started when Frank announced the company’s intent to focus on our core retail business and rationalize non-core activities. Since then, we’ve sold our trade distribution business known as HD Supply. We walked away from plans to acquire Enerbank. We collapsed our ebusiness channel into our core business and we invested capital and expensive dollars into our five key priorities.

We spent a lot of time last year thinking about our optimal capital structure given

our maturing business model. In June, we announced our intent to move from a capital structure that facilitated growth to one that facilitated capital distribution and as a result we announced a $22.5 billion recapitalization plan, which we’ll talk more about in just a minute.

In May, 2008 we announced plans to rationalize new square footage growth and

the closing of 15 under-performing stores. As we look out, we know that our economic engine has changed from one that was driven by new square footage growth to one that is now driven by productivity and efficiency.

As we’ve evolved our capital efficiency model, last year we announced a $22.5

billion recapitalization plan. We completed about 50 percent of our plan using proceeds from the sale of HD Supply and cash on hand. We actually started our share repurchase program in 2002 and since inception including last year’s tender offer, we’ve purchased 743 million shares for $27.2 billion.

Now last year we had intended on raising $12 billion of debt to complete the

recapitalization plan. But we’ve put those plans on pause because of instability in both our business and the credit market. We remain committed to completing our recapitalization plan but approach it cautiously given the current environment.

Now we’ve spent a lot of time thinking about new square footage growth

opportunities in the United States. We believe it’s important to open stores that


June 5, 2008

serve under-stored markets as well as generate adequate returns. This chart sets forth our view of saturation in the U.S. home improvement market. The U.S. home improvement market is heavily stored with over 3,700 home improvement stores.

This chart goes back to 1998. And you can see that back then, the average number

households per home improvement store was about 75,000 households per store. In February, 2008, that ratio has dropped by 60 percent to almost 30,000 households per store.

Our view is that market saturation is upon us, except for market growth. This

means that we need to be very selective when opening new stores. We want to serve growing markets and where it generates acceptable returns for our investors. Now this perspective let us review both our existing U.S. store base as well as our future new store pipeline. And I’d like to share with you how we went about our store rationalization analysis and decision making.

First, existing stores: As a young but maturing retailer, we’ve had very few store

closings. About three years ago we closed 20 Expo stores and in 2007 we closed 11 Landscape Supply stores and 2 standalone floor stores. Our historical approach to closing stores was based on whether or not the store diluted our focus or if there was a strategic rationale behind the closing. We closed our Landscape Supply stores because they were dilutive to our focus and our Expo store closings were a strategic call as we exited markets where we weren’t getting adequate customer draw or conversion.

Now we routinely review our stores from an accounting impairment perspective

and as you know, we don’t have a history of needing to impair stores. But as a maturing retailer we believe it’s important to look beyond the accounting impairment test as we want to ensure that we’re getting the highest returns from our existing stores. We expect our stores to be four wall cash flow positive. We expect them to have a positive net present value and generate higher returns as they age. We do not open stores at maturity and consider all stores under three years old to be immature. Finally, we use return on invested capital as the benchmark for store performance.

We reached our decision to close 15 stores using a disciplined approach. We

started by looking at mature stores but then we ended up by looking at all of our U.S. stores and we made our decision to close stores where the net present value of closing was greater than the net present value of operating or if the store was four wall cash flow negative.

Now the 15 stores had different characteristics but there was one general theme.

And that was, we never should have opened the store in the first place. The


June 5, 2008

locations weren’t(?) great and in some cases we were the third entrant into a small market.

Now in May we culled our new store opening list and announced that we were

removing approximately 50 stores from our new store opening pipeline. We have very targeted return objectives for our new stores and expect their return to equal or exceed the return that we earn on our share repurchases. It’s important to note, however, that we’ve looked at this from a portfolio perspective. In certain instances we will make strategic investments where our existing stores may be vulnerable or where it’s a unique market opportunity.

Post-2008, we will increase our square footage by about 1.5 percent per annum

and we expect the portfolio of stores we open will deliver double digit returns. Now as we look forward, our capital spending will reflect slowing square footage growth as well as the investments we’ll be making in support of our key business enablers that you heard from Mark and Paul and Craig. We expect our annual capital spending to approximate our annual depreciation and amortization expense. This suggests that annual capital spending will be in the $2 billion area. Our projected capital spending includes capital necessary to complete our supply chain initiative as well as fund IT spending necessary to complete our merchandising transformation plan.

We’d now like to move and give you an update on our private label credit card.

This has been a topic of a few earnings calls and investor meetings. We currently offer six products which range from three consumer-oriented cards

to three cards that serve our professional contractors. Four of the cards are private label cards and two of the cards are reward MasterCards where holders get points for purchases. Until 2003 our program was underwritten and managed by GE. As the GE contract is expiring, we put the business up for bid and awarded the business to Citicorp. As part of our deal with Citi, we moved from a fixed fee arrangement to a profit sharing arrangement.

Up until 2003, the card hadn’t really been viewed as a sales driver but beginning

in 2003 we focused on driving sales, capturing more share of lot(?) as well as customer information. Bottom line, the focus was on growth and we achieved solid growth. In 2004 sales on our private label card made up 24 percent of total sales. By the end of 2007, the penetration rate was about 30 percent. Since 2004 the average net receivable, which is underwritten by Citi, has grown from $8.1 billion to almost $14 billion in 2007.

Now as for the cost of private label credit, there are three pieces and here we’re

showing you an illustration as to how the accounting works. First, deferred interest: This is a charge for any deferred financing program. In other words, no


June 5, 2008

interest, no payments for six months. It’s a flat fee and it’s treated by us as a cost of goods sold. Second, interchange. This is a cost to us when a customer swipes one of the cards at the point of sale. It’s like an interchange fee paid for American Express or Visa and it’s treated by us as an operating expense. Third, gain share: This is our share of any profits in excess of a targeted return. The portfolio has been much more profitable than the targeted return so we have been enjoying a gain share, which is treated by us as a reduction in operating expense.

The sum of all three equals the total cost of credit. As a percent of credit sales, the

total cost of credit has dropped from 1.5 percent in 2004 to less than 50 basis points in 2007.

Unfortunately, as we’ve shared with you, the cost of credit is projected to increase

in 2008 and a major factor to this increase is less gain share because of increasing delinquencies and loss rates in the portfolio. Now the average FICO score of our portfolio is actually very good. It’s 726. But the average active FICO score, the one that really matters, is 672, down from 679 last year. We’re seeing a shift from high quality scores to lower quality scores. Underwriting hasn’t really changed. In fact, it’s gotten a bit tighter. But the quality of the cardholder is deteriorating.

The loss rates are increasing across all scores. Last year, the loss rates were

around six percent. This year they’ll be north of eight percent. In February we thought the total cost of credit would reach two percent. It may be a big higher than that. But we’ve stress tested this and we think worst case the cost of credit will not exceed four percent of private label credit sales.

Now we want to take a few minutes and give you our thoughts on normalized

earnings. As we reach maturity, we are more exposed to macro factors. We can’t just power through downturns and our margins have declined in sync with the housing meltdown.

So we started by looking at history to help us understand normalcy. We looked at

a 22 year average for fixed housing metrics and compared the annual metrics in each of the past 13 years against the average to determine which year was more normal based on the long-term average. Our analysis suggests that 1999 was the most normal housing market. Now, our financial performance tends to lag the market by up to one year. And so for those of you who knew the Home Depot back in 1999, it was our best performing financial year and that’s because of the strength of the housing market in 1998.

You can see this more clearly on the next chart. Here you see housing starts and

existing home sales because they have a high correlation to our sales with correlation coefficients or r2 of 0.93 and 0.86 respectively. Housing starts and existing home sales performed their best in 1998 and our comp sales over the past


June 5, 2008

13 years were their best in 1999. This suggests that the normal housing year that we saw on a previous chart of 1999 is reflected in our 2000 financial results.

One other point before we leave this page: 2007 was the worst year from a

housing perspective and this just highlights the headwinds that we are facing in 2008.

So when we think about normalized earnings, we start by looking at our 2008

projected operating margin, which at the high end of our guidance is about 7.6 percent. The 2008 operating margin target assumes negative comps in the mid to high single digit area, returning to a more normalized comp of three to five percent and accounting for some permanent cost increases like stock option expensing we get to a normalized operating margin of just over nine percent, similar to what we reported in 2000.

Now, as we’ve been discussing, we are making strategic investments to drive

productivity and operating margin expansion. So if we use a normalized cost of credit, the benefits of our rapid deployment supply chain and the benefits of merchandising transformation, we get to an operating margin of around 11 percent. Now you heard from Frank and Craig about the opportunities we have in merchandising. Let me make it real for you.

In our lower volume stores today, the markdowns in those stores can be as high as

11 percent of sales. Just by affording(?) those stores and optimizing inventory levels, we can drive profitability and operating margin expansion for our entire company.

Now as part of our long-term financial goals, we’ve established operating targets

which will set our direction and activity. As we discussed, our economic engine will be driving by productivity and efficiency and our operating targets support that goal. Quickly reviewing them, once the market rebounds we expect positive total sales growth in the three to five percent area. We expect to see increased productivity by our associates as measured by year-over-year increase in sales per labor hour. We expect increased productivity inside our stores as measured by year-over-year increase in sales per square foot. We need about $350 per square foot to drive double digit operating profit.

In a normalized environment, our expenses will grow slower than sales and our

operating profit grows faster than sales. Through supply chain and merchandising transformation we are planning to increase inventory productivity so that inventory levels grow no more than 50 percent of sales and payables grow faster than inventory.


June 5, 2008

We plan for capital spending to equal depreciation and amortization and we will drive an increasing rate of return on the capital that we invest. Finally, we should deliver double digit earnings per share growth.

We believe these targets will drive superior investor returns over time. These

returns, coupled with our investor return principles, make Home Depot a compelling investment.

Now I’d like to wrap up by sharing with you our investor return principles. These

are the return principles that we set forth last year. First, our dividend principle is to maintain a payout of at least 30 percent of earnings, which means as earnings increase the dividend will increase. Second, our share repurchase principle is to use excess cash to repurchase shares, as long as the repurchase creates value.

And finally, from a return perspective, we will maintain a high return on capital,

benchmarking all uses of excess liquidity against value created for our shareholders through repurchases. And for our debt holders, we will maintain our strong investment grade rating with access to A2/P2 commercial paper markets. We will target, on average, an adjusted debt to EBITDAR ratio of 2.5 times. We’ll let our underlying cash flow dictate the use of cash, first to the business with excess cash going to share repurchases and we’ll adjust our debt levels relative to the underlying cash flow generation of the business.

I love Dickens’ Tale of Two Cities and the story’s opening line really resonates

for all of us at the Home Depot, “It was the best of times; it was the worst of times.” As far as the economy goes, we’ve never faced anything like we’re facing today. It really is the worst of times. But our focus on our retail business, our focus on doing the right thing for our customers, our associates and our investors has never been stronger.

You’ve never met a more determined company, a company that will leverage its

values-based culture and use its financial strength to weather the economic downturns and emerge even stronger when the market rebounds. For those of us who wear the orange apron every day, it’s the best of times.

We’re glad you joined us today and on behalf of the entire team, I thank you for

your support. And we’ll now move into our Q&A session. Diane, I think you’re coming up. Thank you.

Diane: I invite the presenters back up for the grilling session. Now this is how we would

like to manage our question and answer period, same as we did last year. We have four people with four microphones standing in various areas of the auditorium, Eileen, Dee, Jody and Cheryl. If you have a question, please raise your hand and please wait until the microphone reaches you so that the people who are listening


June 5, 2008

to us on the web can also hear what the questions are. Also, if you would please state your name and the firm you’re in that would be great as well. I guess we can begin. Eileen?

Q: Hi, at Florsham(?). I’m Morgan Keegan. Carol, I think this one’s for you. In the

10Q that you filed yesterday it seemed to have a different number for the effect on sales of seasonality in the first quarter. It looks like it was 270 basis points, which would take your adjusted comp down to -10.3. Did I read that right and if so, what impact did the change between the earnings in the Q?

Carol: Well, our reported comp for the quarter was -6.5 percent and we told you that the

adjustment took it to a -9.2 Q: Great. And then on your slide about normalized earnings and returning to a better

margin, it looks like your merchandising opportunities dwarf your supply chain opportunities. Maybe this was for Carol and Craig, could you break out how those split between lower markdowns and what some of the other puts and takes might be there?

Carol: Well, I’ll start and then Craig, you can jump in. Let’s just look at our lower

volume stores. I took our 500 lowest volume stores and assumed that we reduced the markdowns by just three percentage points, and we can do better than that. Just by taking those 500 stores and reducing the markdowns by three percentage points, we make up 50 percent of the merchandising transformation benefits that you saw on the chart.

Craig: When you look at what happened this spring in terms of the seasonal planning,

and I shared with you that our gross margin productivity growth was almost two times our sales growth, just through the implementation of change that we put into place, better forecasting, more integrated planning process, working with Mark and his team in terms of faster recovery and replenishment to the stores, working with Paul’s team and our field merchandising team to get the right mixes in the right places, that was a huge leverage point for us. And those are the kinds of opportunities that we have going forward.

Diane: Cheryl, did you have…? Q: Hi, it’s Greg Mallick(?) with Morgan Stanley. I have two questions. Carol, you

mentioned the double digit operating margin if and when sales productivity gets back to $350 a foot. And again sales productivity is at more than a ten year low at around $300. What would get back to nine percent and on the flip side here, sensitivity to the cycle, if sales productivity drops to $280, do we start to deleverage more or less now than we have the last year or two just given base stacking levels and things like that?


June 5, 2008

Carol: Well, to get to the nine percent as the normalized earnings we assumed a

normalized comp environment of three to five percent. And as you know, for every point of negative comp we deleverage expenses by about 20 basis points. So for every point of positive comps we leverage expenses by about 20 basis points. So the charts show a 200 basis point swing from where we are to where we’ll be and that just assumes negative comps this year and mid to high single digits and a positive comp of three to five. So that’s what’s driving that normalized. The $350 target is to get to double digit, which is ten plus. And just I think Mark shared a really interesting chart that retailers know there’s about a four percent sales loss because of out of stocks and we certainly know that we have out of stock opportunities. Four percent translates this year to around $3 billion, which is a greater than $10 per square foot opportunity. So supply chain certainly is going to help that productivity as well as everything else that we’re doing.

Now to your question about well what happens if it continues to get worse, that 20

percent or 20 basis points, well, it gets harder to hold candidly. If we were to enter a period of sustained double digit negative comps, which we’re not in, but if we were in I think it would be harder to maintain that will(?) and still stand for service.

Q: And then a follow up on the dividend. You reiterated the 30 percent payout but

then this is an abnormally low year. How do you manage that through the cycle so the current dividend is over 50 percent of the guidance? How do you guys think about that? Like do we hold the dividend or do we take it down to 30 percent?

Carol: We have no intent to cut our dividend. Q: Okay, swell. Carol: Thank you. Q: Thank you, Chris Robers(?), JP Morgan. First question to Mark. As you think

about the DC implementation, it’s kind of like replacing your arteries over a very short period of time. So can you talk about how you’re managing that risk and what you think could -- what are your fears in that process?

Mark: Well, Frank at the Wall Street Journal talked about the dark knight of change,

right? I do wake up at times in a cold sweat wondering about all the things that could go wrong. Having said that, we do address risk in multiple ways. One big area that I think we mitigate risk in is the alignment of this executive team toward the program to ensure that we’re working together to make sure we go through all of the issues and get them solved. We’ve put in place a top notch supply chain


June 5, 2008

team. We’ve brought in a number of key executives with great experience at doing this type of thing. So we’ve got a good staff on the program. We’ve got project management controls in place. We work with our company PMO, program management office, to help us ensure that we’re managing risk through the program and following all of the program management techniques that help you to stay on top of a program like this. Communication with our customers is critically important. We’ve got store people on the team. We work with merchandising. We work across the company to make sure we’re working together on all the issues.

Lots of things could go wrong and occasionally do go wrong in the program. Our

commitment there is to jump on those things as fast as possible and resolve them. We are using proven technology here. The Manhattan WMS platform is one of the top five WMS systems out there and it’s the basis of the warehouse management system’s platform we have. So don’t have a lot of worries about the capability of the system. People is a risk area. I mean we’re building a distribution culture, an organization where there really has not been one around distribution. We’re setting up an academy to train managers and ensure that they know what there is to know about running a Home Depot RDC. We manage process across the network very consistently. We have what we call -- we don’t call them standard operating procedures. We call them common dynamic processes because we are learning so much so fast. And what we do is we post these on a website and ensure that people understand what the processes are as they continue to develop.

So managing risk across the realm of making sure we’ve go the right people,

making sure we’ve got the right processes in place and ensuring compliance to those processes and making sure we have the right technology plus on top of that the right executive oversight and collaboration to get it done.

Q: Maybe as a follow up to that, you talked about Dallas being particularly tough.

Could you talk about that experience? What happened and what ultimately the sales or margin impact was to the stores?

Mark: Yeah. I think if you look at my career here at the Home Depot, I’m almost two

years in and in the grand scheme of the Home Depot that’s like a real newbies rookie. What I would…

[Tape break] Mark: …tell you, at Home Depot you probably wouldn’t open a major RDC

implementation with full ramp and full volume right at the beginning of spring. So that’s the biggest lesson learned probably from Dallas was, wow, we should


June 5, 2008

really ramp these things more carefully, particularly looking at the spring season. So learning things as we go and making the changes that we need to make.

Answer: Mark, if I can add to that. One of the things that’s important as we rollout RDCs

Chris, is that we have a group of division presidents and a group of regional vice presidents of operations who are in this rollout along with the supply chain team. So this is very much not just a supply chain initiative but our regional VPs and division presidents are also owning this rollout and they’re playing a role in making us successful on this rollout. So that’s important as we get into a high speed, high velocity kind of implementation that Mark’s talking about.

Q: Mike _____ with Raymond James. In the normalized margin development, that

up to 180 basis points, you’ve got 140 to 110 basis points in merchandising transformation. I wonder if you could maybe give us a little bit of color of what are those particular items that are in there. Do you parse them out and do we see them maybe even getting to somewhere to that normalized 9.2 and how fast can you see that merchandise transformation?

Carol: Well, Bob(?), as we talked about, if you just take our 500 lowest volume stores

and you assume in those stores that we reduce the markdowns by three points, which is not much, that makes up 50 percent of that 110 to 140. So that’s -- we don’t call it low hanging fruit. But what did you call it yesterday, Paul?

Paul: I call it fruit laying on the ground rotting… Carol: Fruit laying on the ground rotting. Now, we can’t -- you might say, “Well, why

don’t you get that fruit right now?” It takes the tools that Craig and his team are building to get that fruit. So it’s going to take us a while and you saw Craig put an illustrative chart at the end of his presentation. It shows it’s going to take a while for us to get all that.

Answer: But in addition to that, if you think about that kind of a fruit rotting on the ground

and then as you begin to implement the focus _____ approach, you get the kind of productivity gains that we showed in the chart on the lighting program alone where you’re driving 60 percent greater productivity out of those bays. That kind of transformation will begin to take place and that begins to drive the bottom line. Seasonal planning alone was another key element and that’s just the spring planning that we did in one department. There are other areas across our business that we have seasonal planning.

If you think about the merchandising transformation, let me just kind of put it in

perspective in terms of kind of where are we and how do we think about that. We really think about it from two standpoints. Number one is the foundational work that needs to take place. So we’ve got to go through. We’ve got to redo all the


June 5, 2008

processes. We’ve got to train people on how to do their job in a new environment. I would tell you that we’re probably at the end of Q2 somewhere in the 20 percent range done at the end of Q2. The second phase of the merchandising transformation is then to begin to activate all of that and translate it into the actual implementation of the tactics in the assortment, in the presentation, in the vendor structure, SKU structure, line structure and so on. There we are in the infancy. We’re probably ten percent of the way there. So there’s huge upside potential as we move forward and begin to actually drive into the activation phase of our merchandising transformation.

Q: So just to make sure I’m clear. So about half of that, Carol, you think comes from

reduction of markdowns and elimination of just that kind of situation and the balance of it comes from productivity and mix and those kinds of issues. Is that the right way to think about it?

Carol: Yeah, think about it from those perspectives and think about what we did in the

first quarter. Craig talked about the changes that we made from a seasonal perspective. We were able to show gross margin expansion in the first quarter just by running a better seasonal business.

Answer: Just in the seasonal business. Carol: Just in seasonal. Q: One other follow up for Frank. China now is comping double digit. One of my hot

buttons has been China expansion. That’s not on the table right now. Can we get a timeframe or an update as to when you think that might happen?

Frank: I think, again, we’re really pleased with what Annette and her team has done over

a short period of time in terms of taking that business model and making it a good sales model. We’re seeing the positive comps. And I’d suspect we’ll be looking at plans for over the next couple of years how do we get that sustainable model to rollout. We’re obviously not in China for 12 stores. We’re obviously in China to figure out a profitable model that we can then rollout through what looks like a very large market and that’s what we’ll be in the process of doing.

Q: Colin McGranahan(?), for Bernstein. First question is for Mark. You say than the

typical retailer loses about four percent of sales on out of stocks and I don’t think you’d be sitting there if you thought Home Depot was a typical retailer and if it’s four percent, I’ve found that four percent every time I go in the store. I guess my first question is what do you think the customer encountered out of stocks are today and where do you think it can be in a year and two years? And then secondly, on the margin benefit you laid out 20 to 40 basis points eventually. What do you think best in class logistics distribution costs are as a percentage of


June 5, 2008

costs for a hard lines retailer like Home Depot and where are you today versus where you want to be in a few years?

Mark: I think, Colin, first with the four percent of lost sales, that’s based upon a

calculation that says retailers are about eight percent out of stock normally and then more than, about twice that when they put goods on promotion. That’s mostly in fast moving consumer goods. So the four percent lost sales results from an eight percent out of stock rate. People substitute, delay purchases and things like that, that mitigate the lost sales from the eight percent out of stock.

At Home Depot we’re 98 percent in stock from our systematic metrics. Our in

store metrics are -- I think Paul can answer that question probably better. We have 500/600 out of stocks in a store that we find typically from looking at the store.

In terms of the margin benefit, the biggest bulk of the gross margin benefit from

the supply chain transformation comes from transportation benefits. In terms of a normalized what’s a typical supply chain cost going to be for a retailer in hard lines, I think it’s a very difficult question to answer, depending upon how you flow the product through that -- what you view as your optimal flow network. So we don’t report our logistics expense specifically so I won’t get into that. In terms of a normalized number I think it depends on how you’re using your optimal flow network.

Q: And then second question for Carol. Just on the normalized margin again. You

used 1999 as your base year, the most normal year. I think you opened about 22 percent new stores that year and in that year 36 percent of Home Depot’s store base was one or two years old. So obviously those immature stores are going to be much less profitable in their first and second year. Given that you’re now mature, shouldn’t the normalized margins be higher if a year looks like 1999?

Carol: It’s a great question. We looked at this from a number of different angles and we

are very comfortable with the analysis that we put out on this chart. Q: Hi, Todd Dogood(?), Bank of America. Carol, I’ve got a couple of questions on

the fixed income side. You mentioned $282 million debt maturing this year that you plan to pay off with internally generated cash flow. You’ve also got $1.75 billion coming due next year and the question I have is if the market for Home Depot doesn’t improve, if the credit markets don’t improve from where they are today, would you consider using some cash to pay off a portion of that rather than refinance it or what are your plans today?

Carol: As we mentioned, we have a targeted adjusted debt to EBITDAR ratio of 2.5

times and we will use the underlying cash flows to dictate how we will use our


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cash. And so if things start to tighten up we can use cash flow to repay debt. We’ll just deal with that as it comes.

Q: Okay and then second of all, on the recapitalization program, I think our

expectation had been that the additional $10 to $12 billion of issuance would have been done at one time. The way it looks right now since you’re already running up against your leverage target, do you have an expectation for how long that is going to take to complete? Would it be over a period of years as opposed to all in 2009?

Carol: Well, we are approaching the recapitalization plan with caution. Clearly, in this

market I don’t think we can get $12 billion done. International Paper went out for a deal last week. They couldn’t get it done. So I don’t think we could get it done, which would imply a phased approach.

Q: Yes, hi, everyone. I had a question for Craig on the merchandising initiative. I

guess having seen makeovers of this size at other retailers I wonder what the incremental expense is in terms of creating that and also what potential there might be of disruption as people see for the right time what rate of sales look like and what the proper allocation should be.

Craig: So from a staffing standpoint I would tell you that right now we feel very, very

comfortable with not only the people that we have in place but the size of the staff; don’t see any incremental need there per se to drive this transformation. The interesting thing is as we’re working through the processes, we’re then trying to build the tools that support the new processes and we’re doing that in a pretty efficient way. So I have a merchandising operations team that exists in my group and that team has a small group of individuals that actually go and begin the process of building the tools, the new tools that are necessary to support the business when we change how we’re running it. They do that in a very cost effective, inexpensive way. And then once we have that to a format that we feel very good about, we then turn that over to Bob DeRhodes(?) team and they actually operationalize and put it into a production mode and we’re able to save tremendous cost in that process. So I feel pretty good about the fact that we’re not looking at a huge incremental investment.

I think Carol can speak to the fact that we do have in our plan today funds set

aside in our guidance for this transformation and the systems expense and so on but we’re doing it much more cost effectively than we’ve done it in the past.

Carol: Yes, if you look at the capital that we’ve laid out between 2009 and 2012, it

totaled about $8.7 billion. $3.5 billion of that is earmarked for our existing stores. $3.4 billion is for new stores. $1.3 billion is for IT which includes about $430 million for merchandising transformation. I don’t know if we’ll spend it all but we


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put it in the plan. And then there’s about $500 million left for logistics, which is all logistics, not just the RDC.

Q: I think I was also thinking though in terms of the employees in the merchandising

area using these tools, that they’ll be faced with a level of detail and clarity they’ve never seen before. And do you get kind of a deer in the headlights thing when they first react to that?

Craig: Great question. Maybe I can give you an example of actually how it’s making it

easier for them as we kind of add complexity. So a detailed example would be let me talk to you about riding mowers. Atlanta market has a little over 50 stores. In this market alone we have six assortments that we’ve actually built this spring to get to below that market level down to store. We have six assortments that were built just for the Atlanta market. If you translated that to what that looks like across the country, that is over 10,000 SKU store exceptions in a category that has a maximum SKU count in a store of 14. So if you can think of in our old environment the complexity of reports that a merchant might get, it would probably be as high as the stool that I’m sitting on. With the new tool that has been created in terms of the assortment tool, those 10,000 SKU store exceptions across the country have been boiled down to 30 clusters that a merchant has to manage. Very, very manageable. And our merchants are working hand-in-hand to actually help develop the tools with our merchandising operations team. So what we give them is pretty efficient.

Q: Dale Andrith(?) with Merrill Lynch. Just a couple of questions. Mark, you

mentioned as one of the reasons behind developing the RDCs, you mentioned it a few times, was the need to meet minimum vendor requirements. Obviously I realize it’s a symbiotic relationship. But in the past it seemed like Home Depot always had to some extent some leverage over their vendor base. Would you say today that there still is as good of a symbiotic relationship today as you’ve had in the past and do you still have the clout to be able to dictate the terms that you’ve had in the past with your vendors?

Mark: Well, I think first let’s think about vendor minimums a little bit. Vendor

minimums are a good idea, not just to save money for the vendor on having them pick orders that are very small. It’s a good idea from a transportation point of view as well. Whether they’re paying the freight or we’re paying the freight, a very small quantity order…

[Tape break] Mark: …has reduced that minimum down because that hurts us maybe if we’re paying

the freight. So we do have a lot of clout with our vendors. They’re being very cooperative on the RDC implementation. One question I get a lot is are vendors


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objecting to the program? Not at all. In fact, vendors see this as a real step forward simplifying their operations. One of the points of the economics in the RDC program is we work with the vendors to identify what costs should come out of the supply chain and work with the vendors to negotiate an allowance that comes to Home Depot to take out costs that they enjoy benefit from, costs out that they enjoy benefit from as they move to the RDC program. I think these are things that make our relationships with our vendors stronger in that we’re making life simpler for them. And I think as far as the overall tenor of our vendor relationships, I think Craig can comment better on that.

Craig: Yeah, so let me just tag on for a second. If you think about what’s happened to

our business over the past ten years, it was on a chart earlier showing the decline in the average volume per store. So if you step back ten years ago it was a very different way that we could manage the business given the store volume environment. Today, that environment is dramatically different with stores in terms of a volume range that went from like this to -- $20 to over $100 million. So those complexities are very different, which is why the minimum, as that has happened has become more and more of an issue, particularly for our lower volume stores. And so the RDC program actually through the elimination of minimum, now it makes it easier for the store but it makes it easier for our vendors. They only have to deal with a single PO for roughly 100 stores versus 100 POs. They can pick and put in full pallets versus picking individual orders and it gives Mark’s team an opportunity to actually optimize the productivity inside the trailer itself, reducing freight costs.

Answer: And if I can add to that, Allen. One thing to remember on the out of stock number

that Colin was talking about, if you’re in one of those low volume stores that we’re talking about, your inability to meet minimum becomes a significant part of that out of stock number. So a week goes by and you can’t order a particular vendor, you have to wait another week and maybe a third week to order that vendor into the store. So these are kind of heavy duty impacts on the vendor min side, particularly at these low volume stores.

Q: And then a macro question for either Frank or Carol. Having the benefit of

hindsight and being privy to all of your store data on a not only store by store basis but a market by market basis, even if you look at these six of 40 markets that you say collectively are comping positively, is there any shred of evidence in any way, shape or form that’s showing you that maybe the markets that turned down first or that turned down the sharpest are at least showing any signs of stabilization today versus what they were in the earlier part of the cycle?

Frank: Yeah, stabilization is kind of in the eye of the beholder. And I’d say from my

perspective, no. I mean you can kind of tease out some data that says, “Okay, this looks like it’s getting a little bit better here, a little bit worse here in Florida. How


June 5, 2008

do I compare it? How do I look at Orlando versus Tampa?” But I’d say overall we continue to see it’s very tough, even in the markets that were hit first and hardest.

Carol: Miami’s no worse than it was. Orlando’s a lot worse than it was. Q: And just one last question for Carol if I may. With respect to a normalized double

digit earnings growth, what assumption does that imply for a net income growth and specifically to an additional _____? Are you looking for double digit net income growth as well or will EPS growth be driven on a normalized basis by share buyback?

Carol: The double digit EPS growth is certainly enhanced by the share repurchase

program. Our earnings should grow faster than our sales and can reach double digits but for sure EPS will be driven by or assisted by the share repurchase plan.

Q: Unfortunately the first question is on the same slide. But I’m confused and I’m

sure others are in the room. What does the 9.2 represent? Is that where we want to be one day or is that…? Because we’re at 7.2 this year based on your guidance that we use the lower end. How do we get up to so-called normalized in an environment that the sales per square foot are lower than they were back in your normalized year?

Carol: Right. What we attempted to show is that our earnings are depressed today

because of where our sales are. For every point of negative comp we are deleveraging expenses and we could have anchored off the low end. We elected to anchor off the high end. But it’s only a 40 basis point difference. So we just anchored off something. Then we said, “Okay, in a negative comp environment of mid to high single digits, moving from that to sometimes in a normalized environment a positive three to five percent, we will see expensive leverage of 200 basis points. We deducted from that expense leverage some permanent cost increases that have changed from where we were in 2000 like the expensing of stock options, which costs us $200 million a year. So we won’t get the full benefit of 20 basis points for every point of comp change but that’s really how we get to a normalized earnings for the Home Depot.

Answer: The way I’d look at it is just as Carol said. You take the deleverage and then turn

it into leverage and you take that over a period of time and you get to a number and then you’ve got to do a little bit of a sanity check. Okay, is that a realistic number? Then you go back in time and you go, okay, for what looks like a fairly normal year and _____ in every year, it kind of looks like a normal year and you say okay, that’s a good reality check. That makes that nine percent, getting around nine percent sound real.


June 5, 2008

Q: The 200 _____ so we’re assuming two years of five percent comps essentially to get to that 200 because we’re doing 20 basis points per point?

Carol: Right. Well, who knows how it’s going to turn. Depending on how quickly the

market turns you could have eye popping numbers in the first year but then level off. But it’s a path to where we think we can get over a period of time.

Answer: And the other important thing to add and I think Carol may have mentioned this

in her comments is as we go forward the drag that we historically had on our self cannibalization now it will be pretty much at the minimum.

Q: Also, reading from this, there’s really no other cost savings. Like we need comps

essentially at this point. So you’re down to minimum comps. Obviously there’s other things you’re doing to improve results.

Carol: But you heard what Paul talked about is that we’re reallocating because of our

focus on service. So absolutely, fundamental to this is a turnaround in the sales environment.

Q: And then the second question is when you look at closing stores, we _____

positively and we think it’s the right move and we wish more retailers would follow it. Other people could look at it, like your number one competitor and say here’s a sign of weakness; let’s keep on opening in their market because every time we open near them, look, they’re closing. How do you measure that? How do you? Obviously that’s not a financial measurement. But how do you decide we’d better not close because the fact Lowe’s can take advantage of that or sense weakness and keep on growing in the market?

Answer: I mean I would say I’d actually take your question and say internally that was

probably our biggest issue on closing the 15 stores. From a financial perspective and from our shareholders perspective it was exactly the right thing to do and we were frankly worried that internally our associates would see this as, “Oh my gosh, the competition has beaten us,” or vice versa, the competition looking at that as a positive. We worked a lot with Paul and his team and I’ve got to tell you the reaction wasn’t that at all. It was, “Right. This makes sense.” These stores -- as Carol said, if you visited these stores, you’d go, “Yep, those are the right decisions.” And I can tell you I got a lot of emails from our associates saying, “Yep, this is the right call.”

So internally it did not come across as, “Wow, we’ve been beaten in Opelousas,

Louisiana or Beaver Dam, Wisconsin.” This is bad news. This is, “Hey, the company’s making the right decisions long-term.”


June 5, 2008

Q: Hi, I actually want to focus on a different page, page 9, which I found to be helpful. Two questions, the correlation coefficients that you mentioned regarding your sales relative to _____ and home turnover, was that on a lag basis or was that within the same year?

Carol: Those are leading indicators. Q: And then if you think about that and you think about what those metrics are this

year relative to next year, are there any extenuating circumstances in 2008 that when we think about what 2009 might look like could dramatically change those correlation coefficients?

Carol: Nothing that comes to mind. We’ll have to see how this year plays out. I will tell

you having prices which are dropping considerably are lagging indicators. So that’s just important to keep in mind.

Q: Good morning. It’s Matt _____ from Goldman Sachs and two sets of questions.

The first relates to I guess supply chain and logistics. There are two elements of the program that seem like they’re coming a little bit further back in the process. One is core retail. The other is I think Mark what you called the stocking DCUs(?), kind of the fully loaded DCUs which ultimately will probably do a good chunk of your business. Can you talk about I guess how essential core retail is for the vision that you have and then similarly for the stocking DCUs and kind of what the timing is for those.

Frank: Matt, let me do the core retail issue and then I think Mark should handle the

stocking DCUs. On core retail, really where most of core retail is focused is actually on the merchandising transformation issues, not the supply chain transformation although obviously there’s some linkage. But the bulk of it is merchandising transformation. As you know, we’ve got a pilot in Canada with Score(?), what we call Score and we’re now seven stores into it in Canada. But the point that Craig made, I made, we all, this important point to understand here is that for our merchandising transformation we are not waiting for core retail because core retail is -- hey, that’s a very, very long rollout process. For Canada, which is 170 stores, give or take, we’re anticipating by the end of this year.

So we made the decision we’re better off addressing the merchandising

transformation issues just exactly as Craig laid it out. We identified the process that we want. We then identified okay, what’s the supporting system to get that process to support that process and then develop shorter term tools to implement. So core retail is a longer exercise and it’s more focused around merchandising transformation.


June 5, 2008

Mark: And what Frank has described is exactly how we’ve approached it in supply chain as well. Looking at core retail, we’re watching and learning from what Canada is doing with the core retail implementation there and we think there are great benefits ultimately to come from that. But we couldn’t afford to wait based on what we need to do in terms of supply chain and closing that gap. So we came up with the RDC program. It’s a little bit harder without core retail and some of the things that it would offer in terms of foundation data. But it’s not a limiter in what we can get done on what we’ve presented to you so far.

In terms of the traditional stock and pick distribution, we have lots of those

warehouses already existent that handle our import goods and our carton goods. So it’s already established within the Home Depot. There are big opportunities to improve our overall network across the range. We just found that with 60 percent of the value coming from RDC we decided we would address the stock and pick component later on. As we get a little more going in terms of the RDC rollout, feel a little more confident that we can take some attention off of that, we’ll spend more time looking at the strategy for the area’s stocking centers, the stock and pick DCs(?) and then we’ll have a similar migration plan for those going forward. But we’re following a speed to value approach driven by where we found the value and that was RDC.

Q: My follow up question relates to real estate. Even in a saturated market if that’s

the case, essential shopping areas move around, stores get tired, maybe to the extent that a remodel is not enough. What thought have you given in the future to store relocation at some of your stores 20/25 years old? Is that part of your budget? Is that something you think you might entertain going forward?

Carol: Yes, we do relocate stores today, about ten stores a year or something like that

and we’ll always look at as the market moves away from us, should we follow our customers? Is there a better site? So yes, that would just be in our plan to do.

Q: Hi, it’s Brian Nagel(?) from UBS. My question is for Mark and pertains to the

RDC rollout. You articulated on page seven of your slides the gross margin targets, both for 2011 and beyond 2011. Those targets, are they reflective of what you’ve already seen recognizing that -- are they reflective of what you’re already seeing with the three RDCs that you have in operation?

Mark: Yeah, there’s a startup period that actually is a drag on our earnings and that’s

accounted for in Carol’s guidance because of startup expenses and just getting the critical mass. With only 22 percent on board, tough to get the kind of critical mass that we need to get to. So that’s more of an end state. For some period here the RDCs are a debit(?) that we have to work our way through as we continue to open them.


June 5, 2008

Q: In follow up to that, as you look at the RDC rollouts, you have them in Chicago, Atlanta and Dallas, is there any reason to believe that the next group may be more challenging than the first three that you opened?

Mark: I think we’re working to make them easier. I think as I said in the presentation, I

think we learn more with every implementation. We’re developing ways to open them much cleaner, much more on a ratable basis going forward. So we proportion the volume ramp to a less changing ramp. So I think there’s no doubt in my mind we’ll get better at this as we go and every successive opening will be better from here.

Carol: I don’t think we’re trying two at the same time, right? Mark: No. We’ll do -- yes. I mean that’s an important point of mitigation of risk too is

we’re not slamming in more than one at a time. Each one impacts about 100 stores for RDC service. That helps us mitigate the risk going forward as well. We have it as a -- we’ll make changes as we go to improve the process.

Q: David Goff with Bank of America. Paul, when you kind of look at where you are,

so you laid out a lot of things today to improve service. As a snapshot today from one to ten, where do you think service is at Home Depot today?

Paul: Well, I would say we look at a lot of things. Certainly we’re trying to restructure

our expense structure to reinvest more in payroll. That’s a very -- that becomes for us a continuous improvement kind of process that forces us to look at inefficiencies to drive that back. If you measure the way we do, we look at internal metrics like Voice of the Customer. We’re also looking at market share external data. We’re watching the comp gap closely, etcetera. It is difficult in a negative comp environment to see clearly what kind of traction you’re making. I would tell you customer service -- I’ve been at this a while -- it’s never ending. I’d love to say we’re close to the end but we’re not. It’s never going to end for us because we will always have a competitive environment that forces us to get better and better. I am pleased and I would say we’re maybe, in terms of our aprons on the floor activity, it’s a multi-year framework. We’ve modeled out what we think the right number is and what we’re going to have to do to get there. In terms of that, we’re in the first year of a several year process, three, four, five years maybe to get to…

Q: What would you say the improvement’s been over say the last two years? Paul: Well, if I look at a few different metrics, if I look at our likelihood to recommend

metrics that our customers give us and granted those are people who’ve shopped us and bought from us, it doesn’t include folks who are in the external environment or who haven’t visited us in a while, but if I look at those likelihood


June 5, 2008

to recommend metrics, they’re up 30 to 40 basis points in some markets. Overall for the company it’s double digit basis point improvements year over year, the most significant improvements we’ve had in many years. That I feel good about. In terms of market share we’ve not seen -- Craig shared with you some of the numbers around market share so that’s a mixed message. And if I look at our internal metrics around our associates, they’re telling us internally that we are at a several year high in terms of morale, turnover, willingness to serve customers, etcetera.

Q: And one question for Frank. Still periodically there will be rumors in the market

that you guys are looking at buying something in Europe or something. Is there a strategic rationale where you are today that you would do something to that effect?

Frank: Nope. Q: Michael ____ with Lehman Brothers. On that point, and Frank in your opening

remarks you talked about the success you are having in Canada, China and Mexico and having the right business model to take outside the U.S. Perhaps you can talk about the thought process of entering various other international markets, how long the lead time would take to do that and if you are -- if there’s any activities that are taking place today that might prepare you for that.

Frank: First, we have a very small presence in China. It’s only 12 stores. Very large

market. So when we think about our business model, transporting it international and the opportunities, that’s probably from where we are today the largest opportunity that we have in front of us. We continue to have a lot of opportunity in Canada. We also continue to have a lot of opportunity in Mexico. Ricardo Salvabar(?) and his team, as I said, double digit comp growth over the last 14 quarters is really pretty phenomenal. What I would look for us to do over the several years is see how we can take the learnings and strengths, particularly in Mexico and look in the rest of South America, in Latin America and South America to see if there are additional opportunities there for our business model. And as I said, China looks like a very interesting opportunity for us.

Q: I’m Jack ____ Research. I have a question regarding the distribution chain and so

forth. In order for that to be effective you need to know by subcategory of merchandise how well you can forecast sales going forward. My question is do you have new forecasting tools and if you’re using those how well they work.

Answer: We have implemented some new forecasting tools and we continuously improve

our central automated replenishment platform and the mobile order part platform, which includes forecasts going forward. But I might take a contrarian view in that a more responsive supply chain relies far less on forecasts than a less responsive


June 5, 2008

supply chain. By taking time out, by taking lead time out and making those last minute allocations decisions as an example at the RDC, you’re really reducing the reliance on forecasting in your supply chain. So forecasting is very important. It’s one of the things we utilize in supply chain. But in large part our supply chain initiatives are around making forecasts less important.

Q: What about in terms of the forecasting necessary for the vendors to better supply

you more efficiently? Answer: We continue to work with vendors and certainly collaborate with our largest

vendors on forecasting. Our merchant and supply chain teams talk with our vendors constantly about what the sales plans are and work together to develop forecasts and work those.

Q: My bottom line is how well is the forecasting working out? Answer: Our forecasts are improving based on our systems improving. So we continuously

improve the process. Answer: I think if you look at the overall first quarter results that we had, you would see

that the forecasting tools that we’ve provided to the merchants are starting to have a fairly good impact overall. We’ve gone and really driven the ability to forecast down and we’re now forecasting at a class week level, which is a new process for us. We didn’t have that a year ago. And so this forecasting tool has allowed us to do that. I think we are also seeing with key suppliers that we’re engaged with in terms of improving those forecasts that they would probably tell you that they are getting better data from us today and we’re seeing that in improvements in overall fill rates with them. And it’s a really important point because it’s one of the ways that we can help take costs out of our suppliers and allow us to become more efficient with them in the process.

Carol: From a financial perspective, inventories on a _____ basis were down 5.6 percent

in the first quarter. So I think that’s the financial expression of it’s working. Q: Eric _____, Cleveland Research. Frank, you talked a lot about you do it for me

initiative or trend and it seemed like you were servicing that through the in store effort and also through supply. Now both of those seem like they’re -- one’s obviously off the table; the other one is being reduced. How do you think about participating or dealing with the do it for me growth of the market?

Frank: We will continue to provide installation services. As Paul was going through,

we’ve had actually pretty dramatic improvement in terms of our execution on the installation side of our business. Really what my comments were intended to say was much like our online business which was sort of run as a separate business


June 5, 2008

that Craig referenced and then we took it and said, “No. Look, we need to view that as an integrated part of the overall retail effort.” We’re doing the same thing with our services business. We’re not looking at it as an independent growth vehicle. We’re looking at it as how does this support the store in supporting what the customer wants? And then finally, hey, if we can’t do it effectively, Paul and George Sherman and his team, if they go, “Hey, this is a great opportunity but we can’t effectively get at it with good service for our customers,” we’ll be very happy to serve the pros who serve our customers.

Answer: And Eric, the reason that quality message is so important as George and his team

have gone out and targeted this, so much of our success there depends on the store associate’s confidence and willingness to sell that service. That’s why quality is so important. We had to get past a lot of those issues. Just to give you a few numbers, the services team did over 20,000 in store visits to verify quality in the first quarter alone. So the size and scale of this quality effort is very important. We think that paid dividends with store confidence and trust in our service going forward.

Q: _____. I have a question for Mark and Carol. Mark, on your point, just help me

understand a little bit about the decision process to let these RDCs, you control them, you run them versus a third party running them and the disruption that was associated with that in Dallas and are they capable of keeping up if you let a third party run them? And are those people on your payroll or are they running them? And then Carol I had a question for you.

Mark: In terms of third parties, we evaluate using third parties across our logistics

network on various factors as we go into an implementation. We did use a 3PL, a third party logistics company in Dallas. I couldn’t blame all of the issues in Dallas on the third party logistics company. That wouldn’t be fair. They did have their share of issues in the startup. We thought we would try a third party logistics implementation in the RDC program early on to see if that helped us accelerate the program. I’ve said many times we’ve taken a speed to value approach here. It’s not the ten year plan; it’s the three year plan of getting a very large distribution center network up and running. We’ll continue to evaluate third party logistics usage in our network going forward. Dallas might not be the last third party logistics location we use. We’ll certainly manage those third party logistics providers differently in future implementations.

Q: Are they on your payroll, Carol? They’re all on the third party. There’s none of

the expense that you incurred in that relationship? Carol: Well, we paid them a fee, which is accounted toward the cost of goods but they’re

not on our payroll.


June 5, 2008

Q: And then my question for you Carol is you put these _____ normalized number. The normalized number may occur right in the thick of you rolling back SAP into the United States and we’ve all in this room seen margins when you’re rolling back SAP be very volatile. So I guess when you think about normalized, could it be X minus normal, X minus one during a normalized period with the roll back of SAP and the costs associated with that? And could you speak to your plan either to go to cross or retail accounting and the differences between the two and its risks to you?

Carol: Right. When we put together our normalized earnings we didn’t assume any

disruption so that’s a very, very fair point. We have the wonderful opportunity to learn because of what’s happening in Canada. We have SAP in pilot in Canada today. We’re up with seven stores. Thus far we’ve not had that disruption but we’re going to learn because we’ve still got to rollout the rest of the country. And the next year back we can talk about this a lot. But what we’re -- right now we’ll learn from that and all those learnings then will come back into the United States.

We did and are converting from the retail method of inventory valuation to the

cost method up in Canada and we’re learning from that too. So this is a wonderful learning opportunity that we have under way and those learnings will be brought back to the U.S.

Q: Stan Bender(?), Jeffries. I just want to get back to your normalized sales and

earnings margin outlook. I’m just curious with the maturing store base and a lot fewer new stores coming into the base that’ll be comping really strongly in their first and second years, I’m just wondering how -- why is three to five the right number versus maybe two to three which we’ve seen in some other sectors of retail that are maturing like office products for example. And when we take into consideration that the competition is still building stores against you and has far fewer stores in major markets, I guess I’m just trying to reconcile all of that in terms of why three to five is the right normalized number and how you got there.

Carol: We got there by looking at a number of different factors, including self

cannibalization. If you go back to 1999/2000 timeframe, the cannibalization impact to our comps was in the 500 basis point area. So as Frank pointed out, our cannibalization will drop down to virtually nothing and that’s an important piece. Now there are still other competitor impacts out there that we have to be cognizant of, of course. That certainly went into our thinking. We also looked at the fundamental market which, when it returned was a pretty healthy market and Frank showed you what he thinks and what we think the market can do with household formation in this country. So we think based on a number of different factors that three to five percent is the right number.


June 5, 2008

Q: A follow up question: This morning, Wal-Mart talked about Home being positive in May for the first time in over two years. Even Kohl’s talked about Home outperforming the total company for the first time in nine months. I’m just curious and they both attributed it to possibly to tax stimulus so maybe it’s short-term in nature but I’m just curious in the last two or three weeks your thoughts on the tax rebates and how it may impact you this summer has changed.

Carol: Well, as we look at our sales results for May, they were on our expectations. So

could that have been attributable to the tax checks? Perhaps. We think it’s more attributable just to the strength of our seasonal business. We watch this very carefully. Unfortunately, we don’t really have a great way of tracking those sales. But we’ll take every dollar that we can.

Q: Final question: Just to go back to a comment you made earlier about major

remodel not showing the returns. Different retailers look at that different. Some will measure that by incremental sales gains. Some will look at it and say the starting point isn’t zero. It would be maybe we would have had down numbers if we didn’t do it and therefore we have to look at it over the life of the store. Different ways to look at it. I’m just curious how Home Depot looks at it. And in those stores that some of us might argue need a major remodel, what are you doing to significantly improve the store environment?

Carol: Well, you’ve covered us for a long time and you remember us talking about Type

A remodel? Q: Yes. Carol: We spent way too much money and got no return on that. And then we came into

the stores and we did things like appliance mezzanines and we spent a lot of money on appliance mezzanines and we got no return and certainly didn’t do anything for the life of the store. And we can go on and on and on if you want to talk about how we didn’t spend money well inside our stores. What Craig and the merchants coupled with maintenance team, what we’re all trying to do together is spend money wisely to do two things: To drive sales and also protect the customer base that we have to make sure that the store is a shoppable environment because that’s what our customers have told us. They aren’t looking for us to be a boutique. They’re looking for the stores to be clean and uncluttered and easy to navigate and that’s how we’ll be spending our dollars.

Answer: And just also, we didn’t just look at it on a list. We also looked at it on, “Okay,

what would be the continued deterioration?” And as Carol said, some of these activities, they just made no sense because there wasn’t enough of a change that the customers perceived to justify the magnitude of the spend and the disruption that the customers experienced during the remodel.


June 5, 2008

Q: And then just one final question. You mentioned something earlier Carol about

price, prices of homes being lagging and the question was about the metrics that will drive business going forward. I’m just curious in this environment we’re seeing these price declines in homes is very different than prior downturns. So how do you factor that into your thought process in how the customer will spend even if let’s say turnover improves? How do we discount that price factor? How are you discounting it in your outlook?

Carol: Well, our outlook isn’t very rosy, as you know. And it’s anecdotal but what we

are hearing and what we see in the average ticket is customers aren’t spending on the big ticket discretionary projects and we think anecdotally that’s because they’re questioning why should I spend money on my kitchen if my neighbor’s house who’s for sale is dropping price? So we think that’s the behavior that’s happening with the customer right now.

Q: Two questions. One for Mark and one for Paul. Mark, as you know, we’ve been a

big cheerleader of the optimal floor distribution network and this is expected to see gross margins improve earlier than 2011 with 99 percent decrease in POs and an increase in overall efficiency to the supply chain. Could you help us think a little bit more in terms of the details, I’m not going to say you’re sandbagging but could you help us think a little bit more in terms of the details around why it’s only 20 to 30 to 2011 and 30 to 40 thereafter? And what might be the opportunity as we kind of think out to 2015 etcetera?

Mark: I think the chief reason it is so far out is we have so far to go and so many to open

and each opening does have its startup expenses, pre-opening expenses, then a ramp up period to get to where it’s at full production. So that’s what’s taking so long is we’ve got a long way to go and we’ve got a lot of facilities to open and each one of those has it’s own divots(?) as it goes forward. So that’s really what’s taking so long.

Answer: I’m glad you see the sandbagging too. Mark: I hope you think that three years from now. That’ll be my supreme desire to be

known as the biggest sandbagger. Q: And as we think about 2011 as the base year, could we think about that kind of

one inventory turn, is that kind of 30 to 40 basis points year starting in 2011 or how should we think about that?

Mark: I think it’s tough to work that one. We had a pretty good inventory performance in

Q1 but our inventory turnover went down by about that amount. So we feel good about how we’ve managed inventory but in this challenging sales environment


June 5, 2008

it’s tough to get a positive inventory turn going. So I think there’ll have to be some sales tailwinds and we’ll have to start seeing the momentum of the supply chain initiatives to get a 30 to 40 basis point year over year turn each quarter going forward.

Carol: Clearly everything that we’ve shared with you today is assuming that we return to

positive sales. Q: And then Paul with regards to Dunnhumby, I think historically the company has

talked about two percent of your customers representing 30 percent of your sales. I think in the presentation you said that 30.9 percent of your customers are pro. Can you help us think about how that two percent kind of plays out? And then also within that, how are you addressing the different pockets(?) of your customers?

Mark: It’s a great question. The previous segmentation, the two and 30, that was a spend

segmentation that was the original work that came out of the original work with them. What’s happened now is that file now, it has 4 billion transactions in it, three years worth of transactional data, 150 million customers, 11 terabytes. It’s a very large file. And what’s happened now is we have enough data there that we have worked with them to develop a pro model that cuts across the spend segmentation. It’s a little dangerous to assume that your super premium customers really are all pros and it’s dangerous to assume the opposite because pros cut across all segments. So what this pro model is, it’s a deeper segmentation and analysis of pro spend. And that pro spend, the way we find that and identified it is through a series of statistical models looking at all of the known data that we have. We have thousands of VOC responses every week from pros who self identify as pros. We have managed accounts who we’ve known for years who are pros. We know time of day when pros shop. We know categories that pros shop, SIC(?) codes.

So they’ve taken all of that together and created a file of about 2.4 million known

pros, specific, mailable known pros that we know who they are. And then what we can do is we can apply a stimulus to that file or to that set of pros and do targeted activity with Craig’s team on the merchandising side or with our own operations team. We have Pro Desk and Pro Services in practically every store in the chain. So as we look at this pro model we can apply stimulus(?), do different kinds of services, different kinds of activities with them. We can cut that by Hispanic pros. We can do electricians. We can model it in different ways.

So that pro model is separate from that previous spend segmentation you’ve been

hearing from us on.


June 5, 2008

Q: And are you also at this point in the game or is it still too early, are you also target marketing? This is what Dunnhumby is famous for and what allowed them, Tesco to gain easily double their market share _____ that they work with Dunnhumby. Are you seeing also at this point in the game just going through and very much kind of by _____ however you’re looking at it, really kind of target marketing different pieces of the _____ and also your DIYers?

Paul: Thai’s absolutely what happens and I’ll let Craig speak to the DIY strategy. But

on the pros specifically what we learned at Tesco and at Kroger and from Dunnhumby is that it’s very difficult to reward loyalty. And one of the things we’re trying to do is identify ways to target those pros in multiple ways to improve loyalty and increase the headroom(?) and the spend. We only have about 8 to 10 percent of share of wallet we know in our pros. So there is a tremendous amount of spend and what the Dunnhumby team calls headroom available for us if we do the right thing.

Craig: And if you think about our business and this is something that we’re working

through with Dunnhumby, it’s very, very different than a Tesco or Kroger model. So we’re a project-oriented business versus a consumable business for the most part in those environments. So there’s a lot of work being done to tweak their model to understand and pull it into a project orientation business and then how, as Paul says, do you apply the right marketing and stimulus into the known entities to be able to drive results. We’re in the early stages of that.

Diane: Well, I’d like to thank our presenters today, Frank, Carol, Paul, Craig and Mark.

And also thank you, Eileen, Jody, Cheryl and Dee. Now we’re going to -- this wraps up the formal presentation for this morning.

END

home depot transcript

Economy & Finance

core business

home services business

home ownership

core retail business

home depot2008 investor

year average

home building industry

housing prices