Home Depot Stores example essay topic

Declining mortgage rates have created a sizeable economic boost for the building and home improvement industry. The lower rates now allow more consumers to fulfill the old American dream of homeownership. To save money, many of these new homeowners willingly join the ranks of the "do it yourselfers" to tackle repair and improvement projects. Because of the active housing market and the correlating increased demand for building supplies and home improvement materials, suppliers such as Home Depot, Inc. appear to have a bright and promising future. Home Depot, Inc. is classified as a home improvement retailer. Founded in 1978, the company is the world's largest home improvement retailer and ranks among the ten largest retailers in the United States with fiscal 2002 sales of $53 billion.

Its common stock, publicly traded since 1981, is listed on the New York Stock Exchange under the symbol "HD". As of February 3, 2003 (fiscal year-end 2002), the Company operated 1,404 Home Depot stores throughout the United States, Canada, Argentina, and Mexico, and 41 affiliated EXPO Design Center stores in the United States. Home Depot stores sell a wide assortment of building materials, home improvement and lawn and garden products and provide a number of services. EXPO Design Center stores sell products and services primarily for design and renovation projects including interior design products, such as kitchen and bathroom cabinetry, tiles, flooring and lighting fixtures and installation services. In addition to these outlets, at fiscal year-end 2002, the Company was also operating four Villager's Hardware test stores in New Jersey offering products for home enhancement and small projects. The Company also has one test store in Texas called the Home Depot Floor Store, which sells only flooring products.

History When founders, Bernie Marcus and Arthur Blank opened the first Home Depot stores in Atlanta on June 22, 1979, the home improvement industry was changed forever. The first few stores were attached to Treasure Island stores and stocked around 25,000 products. Today, an average Home Depot store is approximately 130,000 square feet, and offers between 40,000 and 50,000 products. The founders had a vision of warehouse stores filled with a wide assortment of products at the lowest process with trained associates offering advice, instructions and the best customer service in the industry.

Because of this service, The Home Depot grew to encompass stores in Georgia, Florida, Louisiana, Texas, and Alabama within the first 5 years. This growth rate continues to this day, with more than 1,400 stores throughout the United States, Canada, and Mexico. The Home Depot is credited as being the innovator in the home improvement retail industry by combining the economies of scale inherent in a warehouse format with a level of customer service unprecedented among warehouse-style retailers. The stores cater to the do it yourselfers, as well as home improvement, construction and building maintenance professionals. Each store staffs a design center with professional designers who offer free in store consultation of home improvement projects ranging from lighting to computer-assisted design for kitchens and bathrooms.

Professional installation services are also offered for select products ranging from single-items such as carpeting and flooring to more extensive projects such as kitchen cabinetry replacement. The company is also testing the At-Home Services program which will offer complete installation of roofing, siding, and window products in limited markets. The Home Depot progressive corporate culture includes a philanthropic budget of more than $25 million for 2002 which is directed back to local communities through a Matching Gift Program tied to associate interests. The major programs funded have been affordable housing, at-risk youth, environmental and disaster recovery projects.

Team Depot, an organized volunteer force, was developed in 1992 to help promote and coordinate volunteer activities within each local community. In February 2003, Home Depot was ranked 6th in Fortune magazine's Top Ten Most Admired Companies and for eight consecutive years, the company has been ranked by Fortune as America's Most Admired Specialty Retailer. Home Depot: Summary of Financial Ratios (Millions of Dollars) Ratio Calculation Ratio Industry Average Comment Liquidity Current 10,361 6501 = 1.6 x 1.55 x Good Quick 3636 6501 = . 03 1.75 Working Capital $3,860 $3,392 $2,734 Inventory Turnover 8.0 6.9 7.0 Return on Assets 11.5% 12.0% 13.6% DuPont Analysis Components 5.7 x 2.03 5.6 x 2.14 6.0 x 2.3 Return on Equity 16.8% 17.2% 18.8% Total Debt to Equity Ratio 31.5% 29.8% 27.8% Earnings per Share $1.30 $1.11 $1.03 Cash Flows from Operations $5,963 $2,796 $2,446 Upward trend noted for total revenues, and both gross profit and operating profit margins indicating increasingly efficient operations and cost controls. Consolidated effect of lower sales recorded per store however, cause reductions in ROI and ROE from prior levels. Current ratio is still strong even though slightly decreased for 2002 with increased total debt indications.

Working capital and cash flows from operations both continue a healthy upward trend indicating adequate funds for operations. Earnings per share are also continuing on an upward trend providing increased return for stockholders. MSN Money Comparison Model: Home Depot vs. competitors Lowe's and Fastenal HD LOW FAST Name Home Depot, Inc. Lowe's Companies, Inc.

Fastenal Company Industry Home Improvement Stores Home Improvement Stores Home Improvement Stores StockScouter rating 8 10 5 Whose share price is estimated to gain the most? Total Sales 58.52 Bil 24.67 Bil 891.40 Mil Total Income 3.69 Bil 1.28 Bil 71.30 Mil Who grew sales and income the most over the past 12 months? Sales Growth 12.40% 22.40% 11.90% Income Growth 27.60% 46.60% 2.10% Whose shares are priced cheapest relative to earnings? Price / Earnings Ratio 16.70 25.00 40.70 Whose financial health is strongest?

Net Profit Margin 6.30% 5.20% 8.00% Debt / Equity Ratio 0.07 0.49 0.00 Whose share price has performed best in the last year? Company Price Performance 3-Mo Price Change -21.5% -7.3% 6.6% 6-Mo Price Change -32.8% -12.0% -2.1% 12-Mo Price Change -47.2% -11.9% 23.2% Industry Price Performance 3-Mo Price Change -16.40% -16.40% -16.40% 6-Mo Price Change -26.20% -26.20% -26.20% 12-Mo Price Change -38.30% -38.30% -38.30% Company relative to all stocks 3-Mo Relative Strength 13 31 68 6-Mo Relative Strength 23 50 70 12-Mo Relative Strength 22 47 83 Noted Insights Three red flags indicate a higher degree of risk even on the lower estimates according to financial analysts: 1. Sales per store continue to decline - a trend expected to continue in the coming quarters. 2. Moderating gross profit comps even on significant gross margin improvement indicates potentially magnified bottom line impact. 3.

Positive SG & A per store trends - a key driver to earnings the past two years - appear to be moderating. These concerns lead analysts to believe that there is a higher degree of risk even on their lower estimates. Should expected declining sales per store trends coupled with either a slowdown in gross margin expansion or the effect from moderating SG & A per store declines - or in a worst case scenario - both, then their $1.80 estimate may ultimately prove to be unachievable. Home Depot's third quarter earnings hit on the bottom line due to significant gross margin expansion, and declining sales per store, however top line results were weak as same-store sales fell 2%. Consequently, a Neutral rating on shares of HD is maintained drawing on this performance as well as some related market considerations. First, sales per store continue to generate lower average volumes.

After peaking out in 2000 during the last mortgage refinancing cycle and stock market boom, store volumes have fallen consistently - a trend expected to continue in the coming years. In third quarter, sales per store declined by 4.8% continuing the trend that has seen negative growth in eight of the last nine quarters. This can be attributed to three observations: 1. HD's self-cannibalization to which management attributes roughly a 4% hit to same-store sales in the third quarter. 2. Lowe's cannibalization as it enters many former HD-dominated markets including New York, New England and the West Coast.

Many of the HD stores in these markets have not faced formidable competition in the past ten years since the last recession drove many of the regional players away. 3. HD is opening more stores in smaller markets that are having difficulty supporting the $40 million volumes to which HD is accustomed. As HD opens more and more stores in counties with 20 K and 25 K households, these volumes could continue to decline. Another consideration affecting the rating is moderating same-store gross profits and rising gross margins. Home Depot has historically been successful at driving earnings by improving gross margin through improved inventory management, improved shrinkage control and a long-held company focus on vendor relationships to reduce costs and lower the cost of goods.

However, the positive gross profit trend reversed itself in the first quarter of this year and has been moderating the past two quarters. There is concern that this slowdown may cause a more pronounced jolt in same-store gross profits and resulting risk levels are increased - even for reduced estimates. BETA The Beta for home depot is 1.17 compared to the Industry's Beat of 1.28 which indicates Home Depot is less volatile than the Industry average. Pro o Earnings growth in the past year has accelerated moderately compared to earnings growth in the past three years. Positive o Two or more executives, directors or major shareholders purchased a large number of shares recently. Very positive o The price-to-sales multiple is slightly lower than the average for all stocks in the StockScouter universe.

Neutral for a medium- to large-sized company like HD Con o One or more analysts has modestly decreased quarterly earnings estimates for HD. Negative SWOT Sales: Total Sales for the quarter increased 8.9% to $14.5 billion, driven entirely by new store expansion. Comparable store sales for period declined 2.0% and the company offered the following four reasons for the decline: Customer Traffic Below Expectations: Despite an increased investment in inventory in the stores during the quarter as well as above plan investments in advertising, many store resets contributed to customer traffic that was below expectations. Management estimates that this potentially impacted comp store sales by about 1%. Declines in Lumber Prices: Depressed lumber prices put pressure on lumber comps. Currently, lumber represents about 12% of overall sales volume.

The company indicated this impacted comps by about 1%. Depressed Mill Work Sales: With the anniversary of last year's energy crunch, sales of energy efficient windows and exterior doors were down, impacting comps by an estimated 1%. Cannibalization: Companywide, 22% of HD's existing stores were cannibalized by new store openings, with that number as high as 30% in California and the Northeast. The company indicated this impacted sales by as much as 45% for the quarter. Strengths: Categories that showed the greatest strength for the quarter included appliance sales, which increased 37% for the quarter along with solid performance in plumbing, paint and flooring products. Recommendation Investing in Home Depot stock appears to be a positive move in spite of Lowe's expansion into the same market areas.

Home Depot's established program of customer relations and services far outweigh the competitive effects of Lowe's low prices. Home Depot stock appears to be a sound investment. Given recent trends, Merrill Lynch lowered its 2004 EPS estimate from $1.90 to $1.80 representing 14.6% growth. If the declining sales per store trends couple with either a slowdown in gross margin expansion or the effect from moderating SG & A per store declines - or in a worst case scenario - both, then the $1.80 estimate may ultimately prove to be unachievable.

Accordingly, Merrill Lynch maintains their Neutral rating on shares of Home Depot. Expected Risk / Return Risk Return Low High Factor Grades Fundamental B Ownership A Valuation C Technical C Previous Ratings 1 Month ago 5 3 Months ago 9 6 Month ago 5 Home Depot, Inc. : Stock Rating Summary 8 Home Depot, Inc., a large-cap growth company in the consumer services sector, is expected to significantly outperform the market over the next six months with average risk. 10 is the best possible rating. Bibliography web web web Declining mortgage rates have created a sizeable economic boost for the building and home improvement industry. Lowe's Companies, Inc.

: Stock Rating Summary Home Depot, Inc., a large-cap growth company in the consumer services sector, is expected to significantly outperform the market over the next six months with average risk.