Home Depot Annual Report Analysis

Basic Company and Industry Information

Bernie Marcus and Author Blank founded Home Depot in Georgia in 1978. The first few stores were attached to Treasure Island stores and stocked around 25,000 products. What started out as a small neighborhood hardware store soon sprouted as the largest home improvement store in the nation. It wasn’t before long that Home Depot (HD) shares were being traded publicly on the New York Stock Exchange. Today, Home Depot is a member of the Dow Jones Industrial Average and is one of the “Top Ten Most Admired Companies” by Fortune magazine, which also ranked The Home Depot as “America’s Most Admired Specialty Retailer” for the seventh consecutive year. This company only goes up with increasing net sales and net profit.

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The main ingredient to Home Depot’s success is not only the number of stores there are, but the diverse types of customers they attract. Home Depot attracts contractors, other retail stores, the do it yourselfer, and the average John Doe shopper. Home Depot is also attracting more and more women by increasing and expanding their EXPO Design stores which focuses on wall paper and other types of remodeling. So, whether you’re a contractor looking for lumber to build a house or John Doe who just broke his door handle and is looking to buy a new one, the Home Depot is your one stop superstore.

What makes the Home Depot such a pleasant place to shop is the 201,000 friendly and knowledgeable sales associates. Home Depot forces their employees through a rigorous training program to ensure that which ever department they work in, they know the products they’re selling and have the customer service skills to sell it. Home Depot offers their employee’s stock options and 401(k) retirement plans. On the whole, this is just a few of the many reasons why Home Depot has such a low turnover rate on the average when being compared to other large retail chains.

Even though Home Depot is the world’s largest home improvement retailer, they are still less than 10 % of the total home improvement and other housing and building related product markets in North America. This has led Home Depot to expand rapidly not only in the United States, but overseas as well. There are Home Depot’s in Canada, Chile, and Puerto Rico. One of their primary goals at the moment is to penetrate into the Latin American market. During fiscal 1999, the Home Depot opened 169 new stores; one every 52 hours. Their goal is to have 1,900 stores by the end of fiscal year 2003.

Home Depot also has increased their market by starting EXPO Design Centers and Villager’s Hardware. EXPO is a showroom environment focused on remodeling and decorating projects. Villager’s Hardware is designed to attract customers who simply want the convenience of shopping at a small store when undertaking a small repair. Home Depot plans on expanding both of these stores. Another market Home Depot has just started to get into and is expanding is the Internet. They are planning to have an online superstore.

As you can see, Home Depot is a very large successful company. In fact, they more than double their closest competitor Lowe’s in net sales and well surpass them in net profits.

The overall industry looks good going into the future. With the population increasing, more and more homes will be built. In conclusion, with housing prices increasing while supply and demand both increases only means positive benefits to the home stores.

Home Depot appears to be doing great by expanding their market and product line. Their net sales and profits continue to increase substantially at an annual basis while continuing to hold a firm lead on the market from their closest competitor, Lowe’s. Home Depot shareholders are content with the companies prosper with dividends increasing every year while the market value of Home Depot’s stock only continues to increase.

Home Depot is financially stable with positive cash inflow from operating and financing activities with negative cash flows from investing activities, which shows that they’re borrowing money and reinvesting it into the company for expansion.

Home Depot achieved all of their goals; exceeding most of them, regarding net sales, earnings, and stock price. As a result, they strengthened their competitive position in the home improvement industry and solidly positioned the company for long-term success. Net earnings increased 44% in 1999, 169 new stores and a 10% increase in sales at existing stores assisted in 27% total sales gain for the year. The strength in sales was due mainly to new products and services. Home Depot stores are planning to open at a steady rate of 21-22%. With the new Home Depot University, where 50,000 customers improve their do-it-yourself skills over a 4-week program, premiered in all stores. Home Depot is exploring e-commerce and at the same time launching new ventures, such as a EXPO and Villager’s Hardware.

With Home Depot’s success, they are planning on expanding stores at an alarming rate across the United States and around the world. They way they are doing this is by increasing their liability to banks and increasing their stockholders equity.

Home Depot’s accounts payable has increased 407 million, accrued salaries and related expenses rose 146 million, sales tax payable increased 93 million, other accrued expenses increased 177 million, while current investments of long-term debt increased 15 million. The only decrease was income tax payable form 1999-2000.

As stated earlier, due to expansion debt has increased by 816 million, other long term liabilities increased 29 million, deferred income taxes increased 2 million, and minority interest increased 1 million in the last year alone.

As of April 3, 2000 there were approximately 194,935 stockholders of record. The increase in common stock from the previous year was 4 million. This led to paid in capital increasing by 1502 million. Retained earnings during this time increased by 2605 million. During fiscal year 1999 dividends per common share doubled from $0.02 to $0.04. Quarterly stock prices increased from a high of $41.33 in 1998 to a high of $69.75 in 1999.

Home Depot financed their assets in many ways. 21.4% was from current liabilities, 5.8% long-term liabilities, .6% minority interest/deferred income tax and 72.2% from stockholders equity. During this time, Home Depot decreased its long-term liability from the previous year by increasing stockholders equity 7.2%.

Home Depot generated more income from equity by .3% from 1999, which led to using less debt. Debt to equity decreased by 11.8%, which gave them only 6.1% in 2000. Debt to assets decreased 7.2% to 4.4%. The dividend pay out ratio increased 6% to 11%. Home Depot has been able to pay off more debt than the previous years by increasing liquidity .02 to 1.75. The market value to book value increased to 13.02. Home Depot does not use financial leverage, which allows them to incur less risk.

As you can see, Home Depot is very liquid in that they have well than enough money to pay off their debt. Keep in mind however, Home Depot uses estimates and assumptions to report everything. Therefore, the company use of financing might not be accurate.

As stated earlier, Home Depot is increasing at a rapid rate. This is leading to the purchasing of new and more equipment, buildings, and land. Therefore, their cash inflow from investing activities is negative.

Machinery and equipment has increased by 518 million from the previous year. Building and leasehold has increased by 1151 million and land has increased by 509 million. As you can see, the Home Depot is investing a lot of money in expansion. Accumulated deprecation, construction in progress, deferred income taxes and long-term receivables have increased by 676 million. Excess of cost over net assets of acquired companies has also increased by 43 million along with capital leases. Home Depot has 417 million dollars to acquire long term assets than 1999 and increased cash received form sale of long-term assets by 66 million. Home Depot is expanding its long-term asset base.

Home Depot was charged 10361 million on plant, property, and equipment alone last year with an accumulated depreciation of 1663 million. Their depreciation expense was 464 million while paying 12606 million. Home Depot wrote off 4.5% as the depreciation expense in the most recent years (Home Depot uses straight-line depreciation). This implies that the useful life of plant, property, and equipment is around 20 years. 16% of the cost of plant, property, and equipment is in the accumulated deprecation account. The plant, property, and equipment are relatively new being around 4 years.

With all this, Home Depot is able to gain more assets by expansion. The return on assets for 2000 was 14% implying that 14% of total income came from assets. The asset turnover for 2000 was 2.25 telling us that for every $1 worth of asset, $2.25 was made. The profit margin was 6% telling us that for every $1, 6 cents was made.

Home Depot has a .49 asset turnover ratio advantage over Lowe’s and 1.8% more profit margin than Lowe’s

Home Depot’s cash from operating activities remains positive and increases from year to year.

Net sales for fiscal year 1999 increased 27.2% to $38.4 billion from $30.2 billion in fiscal year 1998. This increase is due to full year sales from the 138 new stores opened during fiscal 1998, a 10% comparable store-for-store sales increase, and 169 new store openings and 6 store relocations during fiscal 1999. Gross profit as a percent of sales was 29.7% for fiscal 1999 compared to 28.5% for fiscal 1998. The rate increase was due to a lower cost of merchandising resulting from product line reviews and increased sales of imported products. Operating expenses of sales were 19.8% for 1999 and 19.7% for 1998. Selling and store operating expenses increased by .1% to 17.8% in 1999. This was due to increase in wages from employee longevity. Pre-opening expenses as a percent of sale were .3% in 1999 and 1998. Pre-opening expenses averaged $643,000 a store in 1999 to $618,000 in 1998. General and administrative expenses as a percent of sales were 1.7% for 1999 and 1998. Interest and investment income as a percent of sales was also the same at .1%. Home Depot’s federal and state effective income taxes decreased to 39.0% for 1999 and from 39.2% in 1998. This was due to an increase in tax credits for 1999. Net earnings as a perfect of sale were 6.0% in 1999 compared to 5.3% in 1998, reflecting a higher gross profit ratio partially offset by higher operating costs. Dividend earnings per share were $1.00 for fiscal 1999 compared to .071 for 1998.

Over the last 3 years, net sales have increased by 14278 million while the cost of goods increased by 9648 million. Expenses such as selling and store openings increased by 2529 million along with pre-opening by 48 million, as well as general and administrative increasing 258 million.

In 2000, the operating cash flow to total asset was 14.3%, inventory turnover 4.92, accounts receivable turnover 65.6%, gross profit margin 29.7%, operating profit margin 9.9%.

Home Depot is stronger than Lowe’s in all these categories. In addition, Home Depot gave a larger dividend pay out and has more sufficient liquid assets to cover all the current obligations than does Lowe’s. Also, Home Depot is more effective and efficient in cash and operating activities than Lowe’s.

Summary Statement on Financial Health and Status

Home Depot is an extremely strong company at the moment and looks as if it is only going to get bigger and stronger by expanding more and more into new markets and new locations. Even with all the money invested into new stores, Home Depot is still able to generate millions in net sales and revenue. One concern is if expanding so fast can hurt the company. The answer at this moment is no. As stated previously, Home Depot only makes up 10% of the home improvement industry. Home Depot is looking at spreading world wide into Latin America and Europe. If they become huge overseas, as they are currently in the United States, they might grow to be the largest company globally.

I would make any type of loan, whether it is short or long-term to Home Depot. Their current ratio is only increasing showing that they can pay off their debts. With income expected to just sky rocket more, you know your money is safe with them.

I would also consider purchasing stock of Home Depot. With the anticipation of expansion to just continue to generate an increase in income from year to year would surely force their stock price to increase. Not only by that, by going into more markets makes their name Home Depot more familiar. All in all, this will force owner’s equity to increase and financial leverage to decrease. The bad thing is that with owner’s equity increasing, the amount of dividends paid will most likely decrease. That is why it is important to buy shares of Home Depot as early as possible. If not, it might be a few years before you start making serious amounts of money.

At the moment the stock market seems to be very unstable with Tech stops dropping like flies. I would be very weary on putting any amount of money on the market at this time, unless I monitored a single stock for a considerable period of time and labeled it safe. Just the other day Amazon.com stock dropped a huge percent forcing the company to lose millions of dollars. Last year, people were claiming the stock to be a safe investment with only good things in the future. That proved not to be the case. A safer investment for Home Depot would be by investing money in their bonds. I would just keep away from all stocks at the moment, unless I am 100% sure it won’t flop, which is nearly impossible to do.

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Home Depot Annual Report Analysis. (2018, Jul 02). Retrieved from https://graduateway.com/home-depot-annual-report-analysis/