Smart Cost-Cutting: How Home Depot Built It In

Like many companies, Home Depot (HD) has done its share of cost-cutting. The home-improvement retailer closed 15 underperforming stores in 2008, shuttered its EXPO home-design business earlier this year, and reduced corporate staff. With the housing crisis starting to take its toll on sales back in 2006, Home Depot has been waiting for growth to return for longer than most.

Now the chain's efforts to squeeze out savings have become even more systemic and process-driven. As CFO Carol Tomé reported recently, Home Depot is already $80 million under its expense plan for the year. How did she do it? To help the $71 billion retailer's 2,000-plus stores keep a closer eye on costs, Tomé introduced an "automated checkbook" technology program in its stores earlier this year so local managers can see what they've ordered, compare that to how much money they have in their budgets, and cut back on unneeded expenses.

Before, Tomé says, "they didn't have that visibility." The company also changed how employee bonuses are determined, giving more weight to profits rather than sales. "If you can make a bonus by managing your expenses," she says, "you pay more attention to [it]."

In addition, Tomé ramped up the company's focus on procurement, setting higher expectations for the team charged with buying merchandise and supplies while giving store managers better tools for selecting orders. "Small things can add up to big money," she notes. Just by changing the brand of coffee provided to employees, the company has already saved $500,000. She also directed the procurement team not to hesitate to ask for better terms from suppliers. "In this environment, there's nothing you shouldn't ask for," Tomé says. "You should never, never be embarrassed by the 'ask.' "

switching the timing of capital spendingOne of the most critical strategies for staying flexible in a downturn, Tomé says, was heavily weighting Home Depot's capital spending to the back half of the year, giving the retailer the chance to correct course and do less if things got worse in the second half. "Typically we would pull a lot of that spending forward—people want to get their projects done. But we pushed it to the back half. It's given us more nimbleness."

In addition, she went from an annual budget-planning process in 2008 to a semiannual one, allowing her to make changes if things don't go as planned. "That…should help us on the up, as we can redo [the budget] every six months."

When will that "up" happen? Tomé, of course, doesn't know, and she believes strongly that it will be even harder to plan for the recovery than for what to do when things decline. "That willingness to step out and say: 'O.K., I think sales are going to increase rather than decrease'—we're going to have to have some courage. And I suspect we're not alone."

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