Home Depot and Lowe’s
Group member: Pei Xu ID#0314405 Angel Liu ID#14849227 Chengappa M V ID#14852978
The size of the United States retail building-supply industry is large with two main competitors in the industry and with many small and medium size companies. These two major competitors are Home Depot (HD) and Lowe’s. These two companies account for more than a third of the total industry sales. This report is focusing on the analysis of these two companies and aiming to predict their possible future operating performance by using their annual reports from 1997 to 2001. This report includes three main parts which are ratio comparison, HD forecasting analysis and the forecast for Lowe’s. The conclusion and recommendation to investors will be provided at the end of this report.
The first part of this report will focus on the financial ratio analysis about the operating performance of HD, and make a comparison with Lowe’s based on those ratios. The second part will base on the analysis of Galeotafiore’s forecast for HD, at the same time, some opinion about the forecasting is provided. The last part would concentrate on forecasting the five years financial statement for Lowe’s. The five-year Lowe’s forecast will be based on various assumptions and covered both internal and external factors.
The operating performance of HD has been determined through those financial ratios in exhibit 7 of the case. The analyst Galeotafiore has represented the performance in five sections; there are profitability, margins, turnover, growth and leverage. In the profitability section, the ROC and ROE has identified that the return on investment of HD is quite stable with a slightly increase during the financial crisis from 1997 to 2001. It could be a good signal for its investor, and it also enhances the investors’ confidence as increasing ROC and ROE means the company is efficiency at allocating the capital under its control to profitable investments and can generate profit with the money shareholders have invested.
In the margin section, HD also presented a stable increasing trend. An increase in the gross margin percentage indicates that there is an increase in the competitiveness of a HD's products and/or services. However, in the growth section, it should be noticed that the total sales growth has been slowed down since 2000. Especially the sales growth for existing stores has become negative in 2000 and 2001. Therefore, the management of HD should implement some strategies to prevent the decreased sales trend. In addition, HD has managed it cash operating expense quite well because the rate maintained at a constant level although there is an increasing in the number of stores.
Based on the turnover section, it indicated that the daily operating efficiency of HD is going well by using its capital as almost all the turnover rates kept a gradual incremental trend.
According to the leverage section, HD is considered less risky as it had a positive and constant total capital to equity ratio in the past five years because this ratio shows a snapshot of how financially strong a company would be if its revenues dried up. Companies with a high ratio indicate that they at least have valuable and enough assets that they can turn into cash if needed. Therefore, it might attract more investors to invest into the company.
Overall, the operating performance of HD seems quite good as almost all of the ratio showed a positive result.
In the excel ratio analysis sheet, same ratio analysis methods are used when analyzing the performance of Lowe’s. By comparing the ratio for both companies in 2001, HD seems has stronger competitive advantage than Lowe’s, as most ratios are higher or present better than Lowe’s. To illustrate, the ROC of HD is 15.2% which indicates that a positive after tax profit as a percentage of total company