Laying out a clear perspective on growth, risk and capital allocation ensures that all stakeholders have a firm grasp of a company’s approach and enhances shareholder belief in real opportunities, even despite the presence of short-term pressures.
Founded in Marietta, Georgia in 1978, The Home Depot (ticker: HD) is among the world’s largest home improvement retailers. Celebrating their 40th anniversary in 2018, the New York Stock Exchange-listed company generates annual sales revenues in excess of $100 billion across their North American store footprint with over 2,200 locations. The company was among those identified by our 2018 Investor Guidance Preferences Study as a leading example of a company whose investor relations team continually provides a strong long-term plan.
Strategy
Home Depot uses an apt metaphor to describe their strategic framework: a three-legged stool. The three legs – customer experience, product authority, and capital allocation – drive the company’s productivity and efficiency. The ‘seat’ of the stool represents the company’s end-to-end approach to interconnected retail, focused on driving a seamless experience for customers. Alongside this strategic framework, Home Depot issues three-year targets, updated annually and rolled forward at periodic company-hosted Investor Conferences. For example, 2018 targets were first introduced at HD’s 2015 Investor Conference, while 2020 targets were first issued at the 2017 Investor Conference.1
Capital Allocation
To help explain how these three-year targets will be achieved, and in keeping with the view of many investors that strategy and targets are not credible until funds are invested, Home Depot shares their planned approach to capital allocation. These details include:
- Total forecasted spend;
- Break-down by spending category;
- Outline of ROIC guidelines that inform their investment decisions, including target mix of debt to equity, targeted debt/EBITDAR ratio, and benchmarking criteria;
- Return of capital to shareholders, highlighting target payout ratio and the preference for use of cash to buy back shares only after meeting the needs of the business.
Core Drivers of the Business
Since the company’s business is heavily linked to the housing and construction cycle, as well as the interest rate environment (which impacts borrowing for home purchase and improvement projects), the company’s view of the economy and housing market forecast frame their forward-looking targets and core drivers of growth, namely household formation, home price appreciation, housing turnover, and age of housing stock.2
In conjunction with the multi-year targets, Home Depot also issues annual guidance for comparable store sales growth, total sales growth, operating margin, and a forecast for both diluted EPS ($) and diluted EPS growth (%). These annual targets help track progress toward longer-term plans and serve as interim key performance indicators.
KPIs
When it comes to quarterly reporting, alongside the usual press releases and SEC filings, Home Depot also offers investors a snapshot of key metrics that put the company’s short-term performance into the context of the broader long-term strategic plan.3
By spotlighting key factors, such as departments and product categories that are trending above company average (see below), upcoming product developments or launches, and quarterly numbers that track progress toward longer-term targets, Home Depot keeps investor’s focused on the long-horizon goals.
By bringing shareholders into the fold on key strategic priorities and drivers of the business, and repeatedly reporting to the investment community on progress rather than periodic gains, The Home Depot incorporates long-term planning as a part of standard IR communications.
Building on our research on long-term oriented corporate-investor relations, FCLTGlobal recently released a whitepaper, Driving the Conversation: Long-term roadmaps for long-term success, explores the relationship between corporations and their shareholders, including an in-depth look at how strategic roadmaps like these can make this dialogue more beneficial for all. Visit our Research section to learn more.
The Home Depot 2017 Investor and Analysts Conference, Presentation of CEO Criag Menear http://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/IAC/3-Craig%20Menear%20-%20121%20Print.pdf
The Home Depot 2017 Investor and Analyst Conference, Presentation of CFO Carol Tome. http://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/IAC/9-Carol%20Tome%20121%20Print%20for%20Website.pdf
The Home Depot Q3 2018 Infographic http://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/reports-and-presentations/quarterly-earnings/2018/Q3/2018_Q3_Infographic_V5_linked.pdf