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Case Study

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CURRENT SITUATION

A. CURRENT PERFORMANCE

At the time of this study, Home Depot, Inc. had delivered positive financial results in what was “one of the most challenging retail environments in 20 years” (Annual Report). Ranking among the best in retailing, Home Depot opened 203 new stores, created 40,000 new jobs, and made significant investments in technology, operations, and merchandising in 2002. With a steadily increasing market share of over 25%, Home Depot has maintained its title as #1 in home improvement retail industry (Home Depot and Annual Report).

Liquidity
Current ratio| 1.48:1| Consistent Short-term Liquidity Strength| Quick (Acid-Test) Ratio| 0.45| Inventory Dependencies in 2002| | Inventory to Net Working capital| 2.15| Increasing Trend Over Fiscal Year| Cash Ratio| | 0.27| Decreasing Trend Over 5-year Period|

Operations have provided Home Depot with a significant source of liquidity. However, due to average inventory levels increasing by 7.9% in Home Depot stores worldwide, cash flow decreased from $6.0 Billion to $4.8 Billion in 2002. This reflects not only the external threat of economic instability, but also Home Depot’s growth and expansion initiatives (Home Depot and Annual Report).

Profitability
Net Profit margin| 6.29%| Highest In Industry| |
Gross Profit margin| 31%| 94 Basis Point Increase|
Return on Investment Capital| 18.8%| 50 Basis Point Increase| | | Earnings Per Share| 1.57| Earnings Not Diluted|
Diluted Earnings Per Share| 1.56| 24.6% Increase from 1998 | |

In contrast to its competitors, who experienced decreases in net earnings, Home Depot’s revenues grew by 9%, increasing the Net Profit margin (Yahoo! Finance and Annual Report). Net Earnings achieved $3.7 Billion (17.1% increase from January 2001), where $1 Billion was earned in the 2nd quarter. Return on Investment Capital reached 18.8%, a 50 basis point increase from 2001, which reflects...