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 management efficiency and asset control (Hunger and Wheelen) (Annual Report). Earnings Per Share improved by 21%, because of Home Depot’s repurchase of 69 million shares. This repurchase of Treasury Stock avoided a diluted effect in per share calculation (Annual Report).

Activity
Inventory Turnover| 5.3x| Decrease from 2001|
Days in Inventory| 75.8 days| Considerable Increase Since 2000| Average Collection Period| 6.72 days| Increasing Trend Over 5-year Period| Accounts Payable| 42 days| Growth from 2001 34 days| |

Days in Cash| 13.71 days| Decrease of 17%|
Asset Turnover | 1.95| Decreased from 2.05%| |

High inventory levels at any given time were a pattern for Home Depot in 2002. This resulted in a decline of average inventory goods sold during the period. On the contrary, the Average Collection Period for Accounts Receivable increased, reflecting a longer waiting period for receipt of customer payments for sales. In addition, during 2002, Home Depot experienced growth in Days Accounts Payable Outstanding, due to changing payment terms. The change has benefited Home Depot by allowing flexibility and assistance in maintaining its growth initiatives. At 2002 sales levels, Days in Cash decreased by 17%, though not a problem for Home Depot (Annual Report).

Leverage
Debt to Asset Ratio| 34%| Same Level from 2001|
Debt to Equity| 52%| Leveraged | |
Long-term Debt to Equity| 6.70%| Limited Long-term Borrowing | Current Liabilities to Equity| 41%| Well-Leveraged Short-Term Financing|

Home Depot’s financial strength and leverage ranks among the best in retailing (Yahoo! Finance). Home Depot has consistently limited the use of borrowed funds to finance assets. Although the Debt-to-Equity ratios have risen slightly over the 5-year period, Home Depot is adequately leveraged with funds from creditors and owners. In addition, short-term financing obligations are leveraged with equity and strong liquidity...
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