10 Home Depots Cash Flow Statement example essay topic

Home Depot / Lowe's Financial Analysis 1 Running head: THE HOME LEADER -VS- IMPROVING HOME IMPROVEMENTS The Home Leader -vs- Improving Home Improvements James J. Elliott Capella University Douglas Smith, PhD Accounting and Finance in Organizations Home Depot / Lowe's Financial Analysis 2 Abstract An industry of competition, and tight margins The Home Depot, and Lowe's Company are still at it. Both of these companies stand now as the industry standard for the home improvement sector. The numbers that will be presented in this study show proof that both companies have extremely strong financial positions, and a long future in the home improvement industry. Competition is good for the retailer, but even better for the customer. Each company has its strengths and limitations. The decision on which retailer is the better one must be decided by the individual analyzing of each company.

The Home Leader -vs- Improving Home Improvements. Home Depot / Lowe's Financial Analysis 3 Table of Contents The Home Depot Company... 4 Introduction... 4 Business Description / Strategic Analysis... 5 Strategy, Products and Market Overview... 5 Financial Statements Analysis...

7 The Lowe's Company... 8 Introduction... 8 Business Description / Strategic Analysis... 9 Financial Statements Analysis... 10 Cash Flow Statements... 10 Home Depots Cash Flow Statement...

10 Lowe's Cash Flow Statement... 11 Solvency, Liquidity, and Profitability... 12 Home Depots Solvency, liquidity, and profitability... 12 Lowe's Solvency, liquidity, and profitability...

13 Impacting Regulatory Bodies... 13 Investment Bankers... 14 Conclusion... 14 References...

16 Appendix A... 187 The Home Depot Company... 187 Consolidated Statements of Earnings... 188 Consolidated Balance Sheets... 189 Consolidated Statements of Stockholders' Equity and Comprehensive Income... 20 Consolidated Statements of Cash Flows...

21 Appendix B... 22 The Lowe's Company Inc... 22 Consolidated Statements of Earnings... 23 Consolidated Balance Sheets...

24 Consolidated Statements of Stockholders' Equity and Comprehensive Income... 25 Consolidated Statements of Cash Flows... 26 Home Depot / Lowe's Financial Analysis 4 The Home Leader -vs- Improving Home Improvements The Home Depot Company Introduction Home Depot company offer a wide range of merchandise and services, and serve three primary customer groups: do-it-yourself customers, do-it-for-me customers and professional customers. A classic Home Depot store stocks approximately 40,000 to 50,000 product items, including variations in color and size. Major product groups include building materials, lumber plumbing, electrical and kitchen; hardware and seasonal, and paint, flooring and wall coverings.

To balance the national brand name products it offers, the Company has formed strategic associations with vendor partners to market products under brand names that are only offered through The Home Depot. "As of fiscal year-end 2001, the Company offered products under more than 30 proprietary and other exclusive brands, including Thomasville kitchen and bathroom cabinets; RIDGID power tools; Behr Premium Plus paint; Mill's Pride cabinets; GE Smart Water water heaters, and Vigor o fertilizer". ('The Home Depot', 2004) "Founded in 1978, in Atlanta, Georgia, The Home Depot is the world's largest home improvement retailer currently operating 1,800 stores, including 1,649 Home Depot stores, 50 EXPO Design Centers, one Floor Store and three HD Landscape Supply stores in the United States, 84 Home Depot stores in seven Canadian provinces, seven Home Depot stores in Puerto Rico and ten in Mexico". The company reported employees approximately 280,000 people. Home Depot / Lowe's Financial Analysis 5 Business Description / Strategic Analysis The Home Depot is recognized as being the leader in the home improvement retail industry by combining the economies of scale inherent in a warehouse format with a level of customer service unparalleled among warehouse-style retailers.

('Home Depot to', 1999) Each Home Depot store stocks approximately 40,000 to 50,000 different kinds of building materials, home improvement supplies and lawn and garden products. New Home Depot stores in the U.S. and Canada range from 114,000 square feet with an additional 20,000 square foot garden center. The stores have a design center staffed by specialized designers who offer free in-store consultation for home enhancement projects ranging from lighting to computer-assisted design for kitchens and bathrooms. Home Depot offers installation services of select products ranging from single-items such as carpet to more extensive projects such as kitchen cabinets. The company is also testing the At-Home Services program which will offer complete installation of roofing, siding, and window products in limited markets.

Home Depot's company stated vision is described in the case as 'to be one of the most successful retailers in the next millennium' which is further defined by Home Depot's management as 'the most successful retailers... will be those, among other things, can effectively profitability extend their reach to global markets'. ('The Home Depot', 2004) Management at Home Depot also states that they plan to take the existing success in areas where they have a base business and use this base to expand into other markets. Strategy, Products and Market Overview I believe that Home Depot has done an excellent job at reaching its goals in the past ten years. They have been able to expand their market by aggressively opening several store Home Depot / Lowe's Financial Analysis 6 locations and using a clustering strategy. In doing this they have become a market leader and they have also been able to keep their SG&A expenses down by eliminating redundant expenses by spreading them out between stores close in proximity to each other. Home Depot is facing a few problems in order to continue reaching its stated goal (s) of becoming a global leader and expanding their existing market.

There are a few established business that are in direct competition with Home Depot such as Lowe's, their number one competitor, and other companies such as Eagle Hardware & Garden of Seattle, who has been preparing for the intense competition that Home Depot will bring them for several years. They also face the problem with trying to expand their base in the Professional Business Segment of which they only hold about 4% of this market. Their competitors in this area are smaller businesses that have focusing on this market for some time. The EXPO Design Center enables customers to obtain expert advice and top quality products for projects as simple as matching paint swatches to total turnkey kitchen and bath renovations within its unique custom showrooms. The company offers facilities maintenance and repair products, and wallpaper and custom window treatments via direct mail through subsidiaries Maintenance Warehouse (R) and National Blinds and Wallpaper, Inc. The Home Depot presently operates in 50 states in the United States and the District of Columbia.

The company also operates in seven Canadian provinces: Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan. ('The Home Depot', 2004) The company's progressive culture includes a munificent budget of more than $25 million for 2002, which is directed back to the communities Home Depot serves and the interests of its associates through a Matching Gift Program. The major focuses are affordable housing, at-risk youth, the environment and disaster recovery. Team Depot, an organized volunteer force, Home Depot / Lowe's Financial Analysis 7 was developed in 1992 to promote volunteer activities within the local communities the stores serve. ('The Home Depot', 2004) The company's stock is publicly traded (NYSE: HD) and is included in the Standard & Poor's 500 Index and the Dow Jones 30 Industrial Index.

Financial Statements Analysis Liquidity Ratios Current Ratio = 2.862 Acid-test Ratio = . 4133 Working Capital = 224 Billion Inventory Turnover Ratio = 4.8 times each yearAccts. Receivable Turnover Ratio = 2.3 times each year Solvency ratios Debt to Equity = 0.349 Times Interest Earned = -150.3 Profitability ratios Return on Assets = 0.4982 Return on Equity = 0.3053 Gross Margin Percentage = 31%Earnings per Share = 57.5 Market Indicators Price-Earnings Ratio = 0.00086 Dividend-Yield Ratio = 0.263 Formulations contributing to analysis were derived from: ('The Home Depot', 2004) and (Norman, 2004) Home Depot / Lowe's Financial Analysis 8 The Lowe's Company Introduction The Lowe's story began in North Carolina more than 59 years ago when H. Carl Buchan, part owner of the North Wilkesboro Hardware Company, envisioned creating a chain of hardware stores. At the time, Lowe's was a typical, small town hardware store selling everything from overalls and snuff to wash tubs and work boots.

Lowe's even sold horse collars at its first store in downtown North Wilkesboro. ('Our Heritage', 2005, p. 1) Carl Buchan later bought-out his brother-in-law and partner, James Lowe, and foreseeing the post-World War II building boom, concentrated on selling only hardware, appliances and hard-to-find building materials. By eliminating wholesalers and dealing directly with manufacturers, Lowe's established a lasting reputation for low prices. Sales grew over time and additional Lowe's stores opened in neighboring towns throughout western North Carolina. ('Our Heritage', 2005, p. 2) The company went public in 1961, and began trading on the New York Stock Exchange in 1979 (NYSE: LOW). During this time, U.S. housing starts soared and professional builders became Lowe's loyal customers, accounting for the majority of Lowe's business.

In 1982, Lowe's had its first billion-dollar sales year, earning a record profit of $25 million. Lowe's stores then reported serving a new type of customer: do-it-yourself homeowners seeking to improve the value of their properties. Anticipating their needs while still accommodating contractors, Lowe " began to enlarge its stores and expanded its merchandise offerings. Lowe's prototype store today is 116,000 retail selling square feet -- compared with the typical 11,000-square-foot Lowe's stores of the 1980's. Lowe's stores stock 40,000 products and have another 500,000 items available by special order -- offering practically everything Home Depot / Lowe's Financial Analysis 9 customers need to build, beautify and enjoy their homes.

Lowe's uses the latest technology to track and order inventory and help customers create solutions for their home improvement projects. ('Our Heritage', 2005, p. 3) Business Description / Strategic Analysis Today, there are more than 1,075 Lowe's stores in 48 states. Lowe's fiscal year 2003 sales totaled approximately $30.8 billion thanks to the efforts of more than 160,000 employee-owners serving today's do-it-yourself er and commercial customer. Although times have changed since Lowe's first opened its doors in 1946, Lowe's values have not - the company remains committed to offering quality home improvement products at the lowest prices, while delivering superior customer service. Lowe's is currently in the midst of the most aggressive expansion in its history. The company opened 140 new stores in fiscal year 2004, will open 150 new stores in fiscal 2005 and has announced plans for 160 additional stores in fiscal year 2006.

In 2004, FORTUNE (R) magazine named Lowe's America's Most Admired Specialty Retailer for a second consecutive year. The Environmental Protection Agency and Department of Energy have also named Lowe's their ENERGY STAR (R) Retail Partner of the Year for 2003 and 2004 for its efforts to reduce green house gas emissions. ('Our Heritage', 2005, p. 3) Lowe's has been gradually surpassing Home Depot in the stock market and some feel the company will move into the number one position in the home improvement market. Lowe's is viewed as a serious competitor and deserves the respect it has gained over the past few years. Home Depot / Lowe's Financial Analysis 10 Financial Statements Analysis Liquidity Ratios Current Ratio = 2.180 Acid-test Ratio = 0.2009 Working Capital = $10309 Billion Inventory Turnover Ratio = 4.02 times each yearAccts. Receivable Turnover Ratio = 3.5 times each year Solvency ratios Debt to Equity = 0.458 Times Interest Earned = 23.9 Profitability ratios Return on Assets = 0.45 Return on Equity = 0.182 Gross Margin Percentage = 31%Earnings per Share = 4.76 Market Indicators Price-Earnings Ratio = 0.1050 Dividend-Yield Ratio = 3.57 Formulations contributing to analysis were derived from: ('Lowe's 2004', 2004) and (Norman, 2004) Cash Flow Statements Home Depots Cash Flow Statement According to Home Depot, the company ended the fiscal year with stockholders equity of $22 billon, $34 billion in assets (including $2.9 billon in cash), and a debt to equity ratio of 6.1%.

Home Depot has $2.9 billon in cash, which indicates that it most likely will remain a strong competitor in its industry. The cash statement indicates that operating expenses increased 11.9% to $13.7 billon for the fiscal year 2003, from $12.3 billon for the previous year. This increase was due to the actuality that Home Depot experienced rising workers compensation insurance, inflated liability insurance costs, and rapidly increasing medical costs. They also note that the store modernization program attributed to operating expenses rising quickly. ('The Home Depot Report', 2004) Home Depot / Lowe's Financial Analysis 11 Financing activities in 2003 equaled to $1.9 billon, compared to $2.2 billon in fiscal year 2002. The main activity that caused this trend was the total repurchase of common stock, totaling $4 billion.

Home Depot also increased dividends paid in fiscal year 2003 by 21% to $5.9 billon from $4.9 billion in fiscal year 2002. Their current statement of cash flow also shows no repayments of commercial paper obligations, or proceeds from long-term debt. Cash and cash equivalents at the end of the year, shown by financing activities, is $2.8 billion. Cash flows from investing activities similarly show an increase in fiscal year 2003 from $4.0 billon from $2.9 billion in fiscal year 2002.

This increase was a direct result of investments in store modernization programs, as well as the introduction of 175 new retail locations. Home Depots also purchased a large amount of current leases in excess of $5 billion. These purchases helped them acquire 86% sole ownership of their current stores. Even with all of the changes between fiscal year 2003 and 2004, Home Depot's cash standing remains relatively strong. Lowe's Cash Flow Statement According to Lowe's, the net earnings for 2004 increased 28% to $1.9 billon or 6.1% of sales compared to $1.5 billion or 5.6% of sales for 2003.

Diluted earnings per share were $2.34 for 2004 compared to $1.85 for 2003. Lowe's also had a return on beginning assets, defined as net earning divided by beginning total assets, was 11.7% for 2004 compared to 10.7% for 2003. This was due to the company experiencing strong sales in lumber, building materials, outdoor power equipment, and flooring. Lowe's operating experiences for fiscal year 2004 were $6.6 billion.

Substantial amounts of operating cost were incurred by advertising as well as new store opening costs. These two activities alone cost the company approximately $7.2 billion. Cash flows from investing activities were $2.5 billion for fiscal year 2004. These activities included purchases of long-term investments worth over $3.8 billion.

These long term investments were Home Depot / Lowe's Financial Analysis 12 primarily money market preferred stocks, municipal obligations, agency bonds, corporate notes, and stocks; including mutual funds. Lowe's investing activities also included a huge sum of fixed assets acquired totaling $2.4 billion. This basically involved the purchase of several building leases. This activity included $52 million in proceeds from stock employee stock purchase plan.

Cash dividend payments also were high at $87 million for fiscal year 2004. Solvency, Liquidity, and Profitability According to Linda Davis, profitability is an increase in stockholders' equity, resulting from revenue exceeding expenses. (Davis, 1992) Contrarily, liquidity refers to a company's ability to meet its cash obligations as they come due. Solvency refers to a company's ability to meet maturing financial obligations consistently as they come due. These types of obligations are separate from liquidity because they are commonly long term financial obligations, and not day-to-day cash requirements. Home Depots Solvency, liquidity, and profitability Home Depots profitability remains strong, according to their financial statements.

They ended the year with stockholders equity of $22 billon, $34 billion in assets (including $2.9 billion in cash), and a debt to equity ratio of 6.1%. Their liquidity, which holds $2.9 billion in cash, sustains the company's ability to meet day-to-day cash obligations. This is a huge amount of cash and could increase the company's cash needs for several fiscal years. They also have a very high debt to equity ratio of 6.1%. This shows us that they have the ability to meet their solvency obligations, because they are not overwhelmed with short-term financial's, such as loans or leases. This solvency ratio helps us determine that Home Depot will remain viable for years to come.

Home Depot / Lowe's Financial Analysis 13 Lowe's Solvency, liquidity, and profitability Lowe's profitability, according to their financial's statement increased shareholders equity by 22.6% in 2003. This increase shows us that Lowe's had a steady increase basically due to sales, which the company has initiated. Their liquidity is cash flows from operations show net cash for 2004 at $3 billion. This cash on hand, due to a better turn on inventory can sustain the company's day to day cash needs for several quarters. However, Lowe's solvency, which pertains to their ability to pay off long-term debt, is stable. This means that Lowe's has large long-term debt agreements and in a changing or down turning market Lowe's financial obligations could be swayed.

('Securities and', 2000) Impacting Regulatory Bodies The regulatory bodies that most impacts the financial operations of Home Depot and Lowe's is the Security's Exchange Commission (SEC). The following excerpt was taken from the SEC's government website, allowing us to better understand their mission. The primary mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors and maintain the integrity of the securities markets. As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, these goals are more compelling than ever.

("Securities and", 2004) What we take from this statement is that the SEC is there for our protection as investors, as well as the protection of the organizations. These companies are both directly impacted by the operations of the SEC because the rules and guidelines regarding financial activity must be adhered to strictly. No financial transactions may be completed without direct approval and inspection by this agency. Both companies also report to the FASB. The FASB affects both companies in the Home Depot / Lowe's Financial Analysis 14 manner in which sales are reported. This information was attained via the investment hotline at the corporate office of Home Depot.

Investment Bankers The Home Depot deals with numerous investment bankers. The two most prevalent investment bankers they deal with are CSFB (Credits Suisse First Boston), and Bear Stearns. They last two securities offered from the companies were both common stock. Home Depot offered common stock via CSFB in 1991 in the month of April. Prior to that they offered common stock via Bear Stearns in 1981 in the month of September. (This information was also attained via the Home Depot hotline.) Conclusion Both of these companies stand now as the industry standard for the home improvement sector.

These two companies are in current competition with each other and are rivaling for the same business. Home Depot stands to be number one in that industry, whereas Lowe's currently is number two. Both companies are presenting impressive numbers, and their will always be a need for competition in this industry. The numbers that have been presented in this study show proof that both companies have extremely strong financial positions, and a long future in the home improvement industry. The decision on which retailer is the better one must be decided by the individual analyzing the company.

Home Depot has low stock prices but is number one in the industry, number two in retail, and earned 4 million dollars in interest last year. Lowe's paid out 180 million dollars in interest last year but, is number two in the industry, number fourteen in retail, and has impressive stock prices. These rival companies Home Depot / Lowe's Financial Analysis 15 have been compared briefly and are both solid companies. The numbers tell a story, the investor must interpret that story. Home Depot / Lowe's Financial Analysis 16

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