Letter #33: Home Depot (1982)

1982 Shareholder Letter by Bernard Marcus and Arthur Blank

*Note: Started a new project where I digitally catalog the bookshelves/book recommendations of some of my favorite thinkers and doers. You can check it out here: Bookshelves.

Hi there! I go by KG, and I love studying the history of business and investing. I’ll be sharing some notes from one Investor/Shareholder letter per weekday (mostly from my compilations) here.

Today’s notes are on the 1982 Bernard Marus and Arthur Blank The Home Depot Shareholder Letter. This was Home Depot’s third year of operation, and first as a public company.

You can find this essay in my Arthur Blank and Bernie Marcus Compilation under Consumer/Retail Operators. This particular letter starts on Page 1.

Notes

The management of The Home Depot is pleased and gratified to share with you our first published Annual Report as a public company. The Home Depot only recently completed its third operating year, commencing with the opening of the first two stores in June 1979. That year marked the beginning of the downturn in the nation’s economy, however, it was during this tight economy that The Home Depot successfully expanded from approximately 120,000 square feet to 500,000 square feet of retail selling space in eight stores in two of the southeast’s most active markets, Atlanta and South Florida

  • Great businesses are started/succeed in during economic contractions (See Steve Jurvetson Speech)

  • 4X’ed square footage!!!

During fiscal year 1981, some very notable events in the life cycle of The Home Depot occurred:

September 3, 1981 — Two new stores opened in Lauder-dale Lakes and Hollywood, Florida, generating customer counts and sales beyond projections.

September 22, 1981 — The Company had a successful initial public offering and its shares are traded on the OTC market under the NASDAQ symbol HOMD.

November 3, 1981 — The Hialeah and South Dade stores had their very successful grand openings and all stores participated in the sales excitement and product movement.

January 13, 1982 — The Company had a three-for-two stock split-up effected in the form of a dividend in order to broad its stockholder base.

  • In its third year, Home Depot IPO’ed AND split their stock — this is unheard of today (at least as far as the universe I cover goes)

After the close of the fiscal year ending January 31, 1982, we were pleased to announce record sales and profitability despite expensing almost three-quarters of a million dollars attributed to preopening costs for the four new Florida stores.

  • Profitable even after upfront fixed costs of opening stores

Sales for the year increased by 131% from $22,318,493 to $51,541,957. Earnings before extraordinary item increased 168% from $452,660 ($.11 per share) to $1,211,074 ($.29 per share) and from $855,913 ($.20 per share) to $1,445,339 ($.34 per share) after the extraordinary credit relating to the utilization of prior years’ net operating loss carryforwards. Fourth quarter earnings before extraordinary item increased 159% from $246,198 ($.06 per share) to $638,211 ($.15 per share).

  • Sales up 131%

  • Earnings before extraordinary items up 168%

    • What are “extraordinary items?” Go dig through the footnotes

      • Oh lol extraordinary credit relating to utilization of prior years’ net operating loss carryforwards — go look at exactly what this is anyways

  • Q4 Earnings before extraordinary items almost tripled

Results indicate that The Home Depot’s do-it-yourself warehouse concept has been positively accepted by our customers, whether they be novice or veteran do-it-yourselfers, or small contractors or remodelers. Despite the economy, customers are coming in record numbers to our warehouse stores.

  • Solid product-market fit — prove it through results (can you show product-market fit without traction/results?

  • Fun fact: “The term "do-it-yourself" has been associated with consumers since at least 1912 primarily in the domain of home improvement and maintenance activities. The phrase "do it yourself" had come into common usage (in standard English) by the 1950s, in reference to the emergence of a trend of people undertaking home improvement and various other small craft and construction projects as both a creative-recreational and cost-saving activity.

Our success has come from hard work and we credit our employees, suppliers and manufacturers, buyers, managers and our executives with a willingness to contribute more than their share. As the number of our employees grows and as more and more customers are attracted to our stores, the harder we work to deliver the kind of merchandise that is desired.

  • Stakeholder theory — employees, supplier, manufacturers, buyers, managers, executives

  • Why would more and more customers be attracted to their stores?

  • I’ve always wondered about what “working harder” means — has always been kind of vague and unaccountable as a metric

We should note that during the months that this company doubled its size, a tremendous burden was placed upon its employees in both markets. Top management efforts to establish the new Florida stores allowed the Atlanta team to demonstrate their ability to operate with less supervision. The Atlanta group was well prepared to meet this challenge and not only supplied the key employee base for the Florida stores, but maintained the key employee base for the Florida stores, but maintained their sales and earnings momentum. We are please to acknowledge that each of the Atlanta stores registered significant sales and earnings increases over the prior years. Furthermore, we are pleased to report that the Florida stores, since opening in the fall of 1981, are all operating profitably.

  • More responsibility -> less supervision

  • Atlanta team members used as supply for Florida stores — I rarely see companies actually dispatching team members from one location to another -> would love to see this more within an investor’s portfolio companies (ie Tencent/Alibaba)

  • Everything is profitable!!

This effort has resulted in THE HOME DEPOT being voted the 1982 RETAILER OF THE YEAR in the home center industry by Building Supply News. We thank the manufacturers and other retailers in our industry for their recognition.

  • Always good to be recognized by your partners and peers

Our plan for the future calls for expansion; site selection studies are in progress. Continued attention to astute buying, aggressive promotion, recruitment and training of capable personnel as well as stringent emphasis on overall cost control, we believe, will allow us to continue our profitable growth.

  • Best practices in: buying, promoting, recruiting, training, cost-control

Finally, we want to thank you, our shareholders, who have demonstrated your confidence in our management team, a confidence we intend to maintain.

  • Show traction, but no “Thank you” to customers…

  • Thank partners and peers, then shareholders

Wrap-up

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