RE: Re[2]: HD Case: Proposed Plan ,
 sorry  i forgot to attach my draft memo to my earlier e-mail - duh hate when 
i do  that!
?
here  it is again, but now revised to reflect your e-mail comments sent 
around today  (accurately i hope)
?
look  forward to discussing with all at 7:30
-  cv
?
?
?

Carolyn M. Vavrek 
Manager - Human Capital Advisory Services 
Deloitte & Touche 
50 Fremont  Street 
San Francisco, CA? 94105  

phone: 415-783-5137 
fax: 415-783-8760 
e-mail:  cvavrek@deloitte.com 
-----Original Message-----
From: Anil Sama  [mailto:asama@yahoo.com]
Sent: Wednesday, February 07, 2001 11:14  AM
To: Mark Guinney; Jeff.Dasovich@enron.com;  cvavrek@deloitte.com
Cc: chin@haas.berkeley.edu;  sama@haas.berkeley.edu
Subject: Re: Re[2]: HD Case: Proposed  Plan



All,

I was thinking along similar lines - HD should moderate growth in  the
coming year - only invest in opening 2-3 new stores in locations with  the 
highest estimated ROI, or perhaps those that are?the most  complete
(since there is some construction in progress already) to reduce  any
incremental expense.?
Focus instead on improving operating  efficiencies which have been 
steadily deteriorating to increase investor  confidence/stock price. 
Then expand via another public offering at a later  date.? 

Sarah had asked in class to look?into whether HD was  going to be 
able to make payroll in the coming year. I tried to do this  assuming no 
expansion (freeze all construction in progress). Using Mark's  
spreadsheet and backing out the new store acquisition
costs, and  reducing inventories that would have been part of the 
new stores, this  still leaves a cash need from financing 
of $25.8 mil in order to meet  operational needs. So they?are going to 
need to tap into credit lines  for at least this amount regardless. 

I will be in class tonight. If you have a conf call, could we do it  at
7:30? If we do, please send across details before 5PM, or else 
you  can just leave me a voice mail on my cell at 916 600 1245
and I'll retrieve  it during break... 

-Anil 

? Mark Guinney <Mark_Guinney@watsonwyatt.com>  wrote: 
Jeff,  I assume you can coordinate a conference call from work. Call me at  
home:
415-388-2548.

Excellent points and I was thinking along  similar lines. Questions I have:

How do you know that LT debt gives  more advantageous terms? We have no yield
curve info nor do we know their  credit rating.
At what point does their borrowing exceed their  covenents?
Is our strategy to not raise the required $66million or to  stop/slow PPE
spending so that the $66m is not  needed?



**********************************************
Mark  D. Guinney, CFA
Consultant
Watson Wyatt Investment Consulting
345  California Street, Ste. 1400
San Francisco, CA 94104
(415) 733-4487  ph.
(415) 733-4190 fax


____________________Reply  Separator____________________
Subject: Re: HD Case: Proposed  Plan
Author: Jeff.Dasovich@enron.com
Date: 02/07/2001 11:25  AM

Hi folks:

Since we have only one page, the write up for  number 4 will have to be very
brief. Before writing it, though, I wanted  to offer a few bullets
regarding what angle we might take, and let folks  respond, comment,
counter, etc. before writing it up. I'll clean and beef  up once we've
agreed to the approach we'd like to take to question #4.  Finally, I can
work from my office on this this evening, which means that  I can use the
conference call capability of my office phone to patch  everyone in if we'd
like to do a conference call. If that's what folks  would like to do, I'd
prefer to do the call at around 7 PM. Just let me  know.

Best,
Jeff

The question for #4 is:

Stock price  is down 23%, significant debt has already been tapped to
support massive  growth and covenants on that debt restrict taking on a lot
more  debt.

What should HD do w.r.t. current operations and future growth  strategy?
In the near term focus less on growth and more on getting  margins and
EBIT growth back in line with results from previous years.  (Management's
Letter to Shareholders alludes to this, but it's difficult  to determine
whether management is just paying lip service to the need to  capitalize on
the growth spurt and grown earnings, or continue on the  growth effort.)

With respect to funding future (more moderate  growth), the company
does have some room to increase long-term debt  (e.g., current ratio for
1986 = 2.26). It seems that HD would get better  terms and have increased
flexibility by issuing additional debt rather  than relying on lines of
credit. As such, HD ought to look those sources  of funding and fill in any
"funding gaps" with funds from the line of  credit.

Given the significant drop in stock price, HD is likely  better off in
the near term 1) moderating growth, 2) improving  performance to generate
cash internally, and 3) using long-term debt  issuance to provide the funds
needed. Once performance and stock price  improves, then HD should consider
a stock issuance.

How can  company improve operating performance?
Reduce selling, store operating  expenses and pre-opening expenses
Improve receivables turnover
Improve  inventory turnover
Improve per store/sales
Consider closing  poor-performing stores
All of which will improve margins

Should  company change its strategy? If so how?
Shift from meteoric growth to  moderate, targeted growth, and focus on
generating positive cash flow  from operations
Focus on improving performance at existing stores;  specifically focus on
controlling costs and asset turnover and  productivity
Consider another debt issuance rather than rely extensively  on credit
line in order to decrease cost of funds and increase  flexibilit



Do You Yahoo!?
Yahoo!  Auctions - Buy the things you want at great  prices.
 - home depot memo.doc
asama@yahoo.com, mark_guinney@watsonwyatt.com, jeff.dasovich@enron.com