The New HD Supply

It’s been almost a year since HD Supply split off from Home Depot, the company that gave it life and then sold it to a trio of private investment firms last August. In the months that followed, HD Supply has had to redefine itself, no small task given its diverse—some might say unwieldy—collection of businesses.

Joe DeAngelo, who stayed on as chief executive of HD Supply, can still see the headquarters of his former employer from his new office building. (Both companies are based in Marietta, just outside Atlanta.) Although Home Depot retained a 12.5 percent share of the company, HD Supply has moved out from under the big orange shadow. These days, when DeAngelo talks to Craig Menear, Home Depot’s executive vp-merchandising, and Paul Raines, executive vp-U.S. stores, it’s about nuts and bolts. Home Depot is one of HD Supply’s largest customers, buying its fasteners, builders’ hardware, rope, chain and other items through HD Supply’s Crown Bolt division.

HD Supply’s new owners are Bain Capital, Carlyle Group and Clayton, and Dubilier & Rice, whose investment portfolios includes Burger King, Dr. Pepper/7-Up, Hertz, and companies in the IT, healthcare, and finance sectors. In a wide-ranging interview with Home Channel News, DeAngelo, who now holds the title of CEO, said he talks with his “sponsors” on a weekly basis. Board meeting are held once a quarter.

“[The owners] are kept up to speed” on what’s going on in the company, DeAngelo explained. The 46-year-old executive, who now oversees 20,000 employees in 45 states and eight Canadian provinces, has spent the last 11 months regrouping, reevaluating and reexamining the company’s divisions and product offerings, particularly in light of the ongoing building downturn.

“We took all the hard actions in 2007, taking costs out of the business,” DeAngelo explained. Last year HD Supply sold its LBM division, largely composed of lumberyards and truss plants in Georgia and Florida. Branches in other divisions were closed or consolidated.

At the same time, HD Supply expanded other parts of its network. Creative Touch Interiors, an interior finishing service for home builders, has built locations in three new cities since January and begun testing out new product categories. A recent launch called Total Choice Advantage aims to provide builders with turnkey sourcing, purchasing and installation for interior finishing products.

While this may seem like a curious time to roll out new programs and showrooms for builders, DeAngelo sees an opportunity “to take over more and more of our customers’ work flow.”

“Our job is to make sure we service the residential builder during the downturn,” he said. “When the upturn comes back again, we want to have a bigger slice of that business.”

By appointment only

Approximately 68 percent of HD Supply’s revenues come from the construction industry. About half of that is residential, and the other half is commercial. The remaining one-third of HD Supply’s business is repair and remodeling contractors, facilities maintenance and interior finishing services for builders through its Creative Touch Interiors division, known internally as CTI.

When Home Depot bought CTI in January 2004, it had only two locations, in Las Vegas and San Diego. But CTI was a foot in the door of the lucrative builder upgrades niche, where new home buyers flush with borrowed cash were often ready to go beyond the standard home decor packages offered by their home builders.

Over the next three years, CTI expanded to 90 locations in 19 states, establishing a national footprint and inking deals with builders in 35 of the top 55 MSAs. Most of the growth came through acquisitions of local flooring retailers and their installers, although CTI built a few green field locations. The company also opened six countertop fabrication plants around the country and is in the process of adding cabinets and window treatments to various markets.

“Some builders want to keep it very simple, but others will have six or seven levels of options,” explained Tom Lazzaro, a former GE executive who became CTI’s president in 2006. Headquartered in Orlando, Fla., Lazzaro also runs HD Supply’s White Cap construction supply division.

Up until this point, CTI has used large design centers like the one in San Diego to serve all the builders in a particular market. New homeowners come into the showroom by appointment only, after they’ve signed their purchasing agreement with the home builder. A CTI interior designer sits down with the homeowners and lays out their options. The standard allowance for flooring might be, for example, $2,000—enough to cover some choices, but insufficient for others. Upgrading to hardwood floors or Berber wool carpeting might cost extra. Decor items not inclued in the builder allowance, such as wooden shutters or vertical blinds, can be purchased from and installed by CTI. Sometimes these upgrades can be rolled into the mortgage. Other times, outside financing must be arranged.

Different types of flooring are inlaid with tile medallions, and large samples of natural stone are stacked on shelves or displayed on the wall. Ceramic and porcelain tiles pull out like drawers and can be laid side by side. Area rugs hang in one corner, and a working kitchen provides inspiration for countertops, now being sold in most of CTI’s markets. With a few exceptions, CTI’s showrooms are “brand agnostic” because most new homeowners are not especially brand conscious, according to Lazzaro.

As Lazzaro explains it, CTI is willing to bring in, and install, almost any product that a builder wants to offer his or her customers. CTI has introduced cabinets into its Las Vegas and Phoenix showrooms; the company is in the process of rolling them out to more markets. Kitchen appliances are being tested in Dallas, and garage storage, along with epoxy floor coating, is a Northern California pilot.

The company is also tweaking its showroom model. “We’ve gotten away from building large design centers,” Lazzaro said. Instead, CTI is moving toward smaller, builder-specific showrooms. “We can get into a market really quick that way,” he explained.

CTI has opened three new locations, in Atlanta, Birmingham and Minneapolis, since the beginning of the year, and is currently “looking at” the Pacific Northwest. When asked about the residential building downturn, Lazzaro said: “We’re expanding into the markets where our customers need us. We think this is a good strategy, especially when some of our competitors [in those markets] are closing.”

Of course, CTI would be perfectly happy to install all the interior finishing products for a home builder. This is the basic concept behind CTI’s new Total Choice Advantage program. Launched last February, the program offers builders a turnkey program for countertops, window treatments, kitchen cabinets and flooring. CTI handles the sourcing and installation; builders get better pricing, a mobile home program and other incentives.

Approximately one-third of CTI’s top 25 customers have signed up for the program or are “seriously considering it,” said Lazzaro. And the vendor community? “Some suppliers see it as a great opportunity to partner with us, and others want to see how it plays out.”

Beyond single-family

Along with its customers, CTI is also moving beyond its traditional customer base into vertical residential and commercial. The company is supplying condo projects, hotels, restaurants and cardealerships. Some of these jobs come through the connections of companies acquired by HD Supply.

“We have folks on board who had been building in these segments and already had experience,” said Steve Spade, who was named vp-marketing and business development for CTI in May. “So we’re able to cherry pick the [right] jobs.”

CTI has continued a partnership with Stiles Construction, a Fort Lauderdale, Fla., general contractor involved in the renovation of Dolphin Stadium in Miami. CTI is installing stone, tile and wood flooring in the facility’s restaurants, amenity areas and VIP suites, a $2.8 million contract.

That job had led to another project: a 1 million-square-foot Lexus dealership, now being built by Stiles Construction in Miami, that will contain dark cherry woodtrim, granite countertops porcelain Italian tiles and a cappuccino bar.

CTI is also dipping its toe in the remodeling/home resale market. One test is being done in San Diego, and another in Columbus, Ohio, in conjunction with Home Depot.

Working with commercial customers would fit nicely into the HD Supply circle, where each division claims a different segment of the construction and remodeling market. The company now divides itself into three units: infrastructure & energy (waterworks, industrial, electrical and utilities); maintenance, repair & improvement (remodeling contractors, property and facilities maintenance); and specialty construction (plumbing/HVAC, White Cap, Creative Touch Interiors).

HD Supply has renamed some of its inheritances from Bob Nardelli, the Home Depot CEO who formed HD Supply with an unprecedented acquisition spree in 2005 and 2006. Contractors Warehouse, the 10-unit chain of no-frills stores in California, is now simply called “repair and remodel.” Hughes Supply, a $3.51 billion acquisition by Home Depot in 2006, has been absorbed by the specialty construction division.

DeAngelo also has an updated “life cycle” approach to marketing, where (at least in theory) the waterworks division would feed sales leads to the team that sold construction supplies, who would then hand off the customer to CTI.

“Our customers don’t want a massive coordinated project [so] that’s not our normal go-to-market process,” DeAngelo said. Instead, HD Supply uses its size to leverage knowledge, he said.

“The bulk of our activities are very similar,” DeAngelo explained. Each quarter, a hand-picked group of people from various divisions at HD Supply give presentations on challenges they face or solutions they’ve found. One example is the cost of fuel and its impact on profitability. Another is pricing.

“We work to create pricing processes that are sharp and relevant,” DeAngelo said. “We want to win every bid, but only by a penny or two.” Because of shared best practices, a newly developed pricing module was up and running at White Cap in six weeks. It was the third roll-out for the company. The first one took six months, DeAngelo said.

HD Supply has also launched its own proprietary brands: Brigade, a contractor-oriented line of products, and Seasons, a home decor label aimed at consumers. So far, Brigade is offering skus in White Cap (caulks, sealants, diamond blades and electrical cords) and HD Supply’s plumbing outlets (couplings, water heater connectors and flexible supply lines, residential valves, pipe insulation). The Seasons label has been placed on some ceiling fans and faucets sold through the company’s facilities maintenance division and sinks offered in HD Supply’s plumbing outlets. CTI will offer a Seasons label of carpeting and tile in the third quarter. DeAngelo said the company plans to release many more products under both labels “wherever [vendors] provide us with opportunities.”