Value Line Publishing,

October 2002
Name: Muhammad Hassan Raza
ERP ID: 23199
Q.1 Galeotafiore expected that
future growth would come from
what sources?
Galeotafiore expected that future growth would come from these
sources:

1. Acquisition/consolidation::
Both companies Home Depot and Lowe’s will get some
handsome growth in the future by acquisition and consolidation of other
companies. They already started to acquire the firms recently. In 1999
Lowe's acquired 38 stores warehouse-format chain Eagle Hardware in a
$1.3billion transaction. Home depot also acquired plumbing wholesale
distributor Apex Supply, the specialty-lighting company Georgia Lighting,
the building-repair-and-replacement-products business N-E Thing Supply
Company, and the specialty-plumbing-fixtures company Your “Other”
Warehouse.
2. Professional Market:
Lowe’s and Home Depot had take an initiative to
give training to their employees to deal with professionals and
carrying professional brands. Home Depot developed the “pro
stores” to spread out the lesser proficient markets.

3. International Expansion:
Home Depot expand their business into the
other countries to capture their market. Home Depot already
acquired the Canadian home-improvement retailer Aikenhead
in 1994 and acquiring Mexican chains Total HOME and Del
Norte. But on the other hand Lowe’s still not entered into the
International market.
4. Alternative Retail Formats:
Depot and Lowe’s both have their online stores. Depot
focused on the urban centers. Depot acquired “Expo Design” as
well who gives services relevant to decoration and have eight
showrooms in a same location. Lowe’s focused on the
professional customers through online stores “Accent & Style”
and also offered decorating and design tips as well.

5. Alternative product:
Both firms Home Depot and Lowe’s offered the installation
services as well to capture the more customers.

6. Head-to-Head Competition
Depot focused on the metropolitan area where Depot can
capture a lot of customers and Lowe’s focused on rural areas. If
Lowe’s want to maintain its trajectory it should have to enter into
the metropolitan areas.
Q.2 Some analysts had a positive and other analysts
had a negative outlook for Home Depot. What are the
assumptions that lead to these suppositions?

ANSWER
The positive outlook for Home Depot comes from positive customer feedback
and labor productivity benefits. Their pro initiative program that takes place in
55% of their stores performed very well and self efficient in productivity,
operating margins, and inventory turnover.
The negative outlook for Home Depot came from the concern of diminishing
returns from home depot because their sales growth decreasing day by day
and even though increase in promotional activity and on the other hand
Lowe’s has increase in their sales over the period.
Q3.Compare and contrast the
Financial Ratios for Home
Depot and Lowes. Which
company is in a stronger
position bases on ratio
analysis?
FINANCIAL RATIOS

Home Depot 1997 1998 1999 2000 2001

Working Capital (CA - NIBCL) 2012 2090 2763 3396 3865

Lowe's 1997 1998 1999 2000 2001

Working Capital (CA - NIBCL) 673 920 1,367 1,288 1,962

Home Depot 1997 1998 1999 2000 2001

Fixed Assets 6769 8532 10691 13608 16033

Lowe's 1997 1998 1999 2000 2001

Fixed Assets 3109 3759 5319 7201 8816

 Home Depot 1997 1998 1999 2000 2001

Total Capital 8781 10622 13454 17004 19898

Lowe's 1997 1998 1999 2000 2001

Total Capital 3783 4678 6686 8489 10778

Home Depot 1997 1998 1999 2000 2001

Tax Rate 38.9% 39.2% 39.0% 38.8% 38.6%

Lowe's 1997 1998 1999 2000 2001

Tax Rate 36.0% 36.4% 36.7% 36.8% 37.0%

Home Depot 1997 1998 1999 2000 2001

NOPAT (EBIT (1-t) 1158 1623 2323 2565 3028

Lowe's 1997 1998 1999 2000 2001

NOPAT (EBIT (1-t) 400 530 742 885 1,133

 PROFITABILITY RATIO

Home Depot 1997 1998 1999 2000 2001

Return on capital (NOPAT/total capital) 13.2% 15.3% 17.3% 15.1% 15.2%

Lowe's 1997 1998 1999 2000 2001

Return on capital (NOPAT/total capital) 10.57% 11.32% 11.10% 10.43% 10.51%

Home Depot 1997 1998 1999 2000 2001

Return on equity (net earnings/s. equity) 16.3% 18.5% 18.8% 17.20% 16.80%

Lowe's 1997 1998 1999 2000 2001

Return on equity (net earnings/s. equity) 15.36% 16.89% 15.80% 16.11% 16.98%
 MARGIN
Home Depot 1997 1998 1999 2000 2001
Gross Margin (Gross Profit / Sales) 29.2% 29.7% 30.9% 31.20% 31.6%
Lowe's 1997 1998 1999 2000 2001
Gross Margin (Gross Profit / Sales) 26.5% 26.9% 27.5% 28.2% 28.8%
Home Depot 1997 1998 1999 2000 2001
Cash operating expenses/sales 20.2% 19.6% 19.8% 20.70% 20.9%
Lowe's 1997 1998 1999 2000 2001
Cash operating expenses/sales 18% 18% 18% 19% 18%
Home Depot 1997 1998 1999 2000 2001
Depreciation/sales 1.2% 1.2% 1.2% 1.30% 1.4%
Lowe's 1997 1998 1999 2000 2001
Depreciation/sales 2% 2% 2% 2% 2%
Home Depot 1997 1998 1999 2000 2001
Depreciation/P&E 4.3% 4.6% 4.5% 4.6% 5.0%
Lowe's 1997 1998 1999 2000 2001
Depreciation/P&E 8.0% 7.0% 7.0% 6.0% 6.0%
Home Depot 1997 1998 1999 2000 2001
Operating margin (EBIT/sales) 7.8% 8.8% 9.9% 9.20% 9.2%
Lowe's 1997 1998 1999 2000 2001
Operating margin (EBIT/sales) 6.0% 7.0% 7.0% 7.0% 8%
Home Depot 1997 1998 1999 2000 2001
NOPAT margin (NOPAT/sales) 4.8% 5.4% 6.0% 5.60% 5.7%
Lowe's 1997 1998 1999 2000 2001
NOPAT margin (NOPAT/sales) 4.0% 4.0% 4.0% 4.0% 5%
 TURNOVER RATIO
Home Depot 1997 1998 1999 2000 2001

Total capital turnover (sales/total capital) 2.8 2.8 2.9 2.7 2.7

Lowe's 1997 1998 1999 2000 2001

Total capital turnover (sales/total capital) 2.7 2.6 2.4 2.2 2.1

Home Depot 1997 1998 1999 2000 2001

P&E turnover (sales/P&E) 3.7 3.7 3.8 3.5 3.5

Lowe's 1997 1998 1999 2000 2001

P&E turnover (sales/P&E) 3.4 3.4 3.1 2.7 2.6

Home Depot 1997 1998 1999 2000 2001

Working-capital turnover (sales/WC) 12.0 14.5 13.9 13.5 13.5

Lowe's 1997 1998 1999 2000 2001

Working-capital turnover (sales/WC) 15.1 13.3 11.6 14.6 11.3

 Home Depot 1997 1998 1999 2000 2001
Receivable turnover (sales/AR) 43.4 64.4 65.5 54.8 54.8

Lowe's 1997 1998 1999 2000 2001

Receivable turnover (sales/AR) 85.9 85.0 107.5 116.6 133.2
Home Depot 1997 1998 1999 2000 2001
Inventory turnover (COGS/m. inventory) 4.7 4.9 4.8 4.8 4.8
Lowe's 1997 1998 1999 2000 2001
Inventory turnover (COGS/m. inventory) 4.3 4.3 4.1 4.1 4.4
Home Depot 1997 1998 1999 2000 2001
Sales per store ($ millions) 38.7 39.7 41.3 40.3 40.3
Lowe's 1997 1998 1999 2000 2001
Sales per store ($ millions) 21.3 23.5 27.6 28.9 29.7
Home Depot 1997 1998 1999 2000 2001
Sales per sq. foot ($) 366.0 373.1 384.3 371.9 371.9
Lowe's 1997 1998 1999 2000 2001
Sales per sq. foot ($) 253.4 255.1 279.1 276.2 273

Home Depot 1997 1998 1999 2000 2001

Sales per transaction ($) 43.9 45.4 48.2 48.8 48.8
Lowe's 1997 1998 1999 2000 2001
Sales per transaction ($) 43.9 45.7 53.2 54.9 56.0
 GROWTH
Home Depot 1997 1998 1999 2000 2001

Total sales growth 25.1% 27.2% 19.0% 17.1%

Lowe's 1997 1998 1999 2000 2001

Total sales growth 20.8% 29.9% 18.1% 17.7%

Home Depot 1997 1998 1999 2000 2001

Sales growth for existing stores 2.6% 4.1% –2.4% -4.0%

Lowe's 1997 1998 1999 2000 2001

Sales growth for existing stores 10.8% 17.3% 4.6% 2.9%

Home Depot 1997 1998 1999 2000 2001

Growth in new stores 22.0% 22.2% 21.9% 17.5%

Lowe's 1997 1998 1999 2000 2001

Growth in new stores 9.0% 10.8% 12.8% 14.5%

Home Depot 1997 1998 1999 2000 2001

Growth in sq. footage per store 0.6% 1.0% 0.9% 1.0%

Lowe's 1997 1998 1999 2000 2001

Growth in sq. footage per store 10.1% 7.2% 5.7% 4.1%

 LEVERAGE RATIO
Home Depot 1997 1998 1999 2000 2001

Total capital/equity 1.24 1.22 1.09 1.13 1.13

Lowe's 1997 1998 1999 2000 2001

Total capital/equity 1.45 1.49 1.42 1.54 1.61

Compare and Contrast
Home Depot has higher average ROC 15.2% and ROE 17.5% compared to
Lowe’s which has lower average return on capital 10.79% and lower
average return on equity 16.23%. Home Depot also has higher average
gross margin rather than Lowe’s higher average gross margin. Home Depot
average gross margin is 30.5% and Lowe’s average gross margin is
27.6%. So average gross margin ratio of Home depot is better than Lowe’s
average gross margin.

Fixed Asset And Total Capital

If talking about fixed assets and capital of both industries Home depot
fixed asset and capital are greater than Lowe’s it means Home depot have
greater assets and capital rather than Lowe’s.
Home depot fixed assets and capital 16033 and 19898
Lowe’s fixed assets and capital 8816 and 10778
Net Operating Profit After Tax
Home Depot Net operating profit after tax is greater than Lowe’s. It
means Home Depot financial position is good rather than Lowe’s.
Home depot NOPAT year 2001: 3028
Lowe’s NOPAT year 2001: 1133

Receivable Turnover Ratio

If I am talking about the receivable turnover ratio Home Depot
receivable turnover ratio is less than Lowe’s it is a good and positive
sign because Home Depot receive their money from their creditors in
a less duration rather than Lowe’s.

Operating Margin
An operating margin is an important measurement of how much
profit a company makes after deducting for variable costs of
production, such as raw materials or wages. A high operating margin
is a good indicator a company is being well managed and is
potentially less of a risk than a company with a lower operating
margin. Home Depot have High operating Margin rather than
Lowe’s.
NOPAT Margin
Net operating Profit After Tax Margin shows the profitability of the firm. Higher
NOPAT Margin is a good indicator for the company and Home Depot NOPAT
Margin have higher than Lowe’s so it means Home depot profitability or financial
position is far better than Lowe’s.

Which company is in a stronger

position?
Home Depot has higher average ROC 15.2% and ROE 17.5% compared to
Lowe’s which has lower average return on capital 10.79% and lower average
return on equity 16.23%. Home Depot also has higher average gross margin
rather than Lowe’s higher average gross margin. Home Depot average gross
margin is 30.5% and Lowe’s average gross margin is 27.6%. So average gross
margin ratio of Home depot is better than Lowe’s average gross margin. So
because of these ratio’s Home Depot financial position is far better than Lowe’s.
All the financial indicators of Home Depot and Lowe’s shows that Home Depot
financial position is far good than Lowe’s because if I am talking about the
profitability Ratios Home Depot is in a stronger position as comparison to
Lowe’s.
Q.4 Compare and contrast the
Financial Forecast for Home Depot
2001   2002E   2003E   2004E   2005E   2006E

Gross margin 31.6% 32.0% 32.3% 32.4% 32.5% 32.5%

Net sales 53,553 63,195 74,049 86,860 100,149 114,000

Gross profit   16,911 20,222 23,918 28,143 32,549 37,050

EBIT   4,932 6,050 7,533 8,837 10,589 12,054

NOPAT 3,028 3,775 4,708 5,523 6,618 7,534

Cost of sales   36,642 42,972 50,131 58,717 67,601 76,950

Return on capital   15.2%   15.1%   15.9%   15.8%   16.0%   16.0%

 Receivable turnover 58.2 55.0 53.0 52.0 50.0 50.0

P&E turnover 3.5 3.3 3.3 3.3 3.3 3.3

Payables/COGS 9.4% 9.4% 9.4% 9.4% 9.4% 9.4%

If I am talking about the next five years financial forecasting of home depot I
found that the Gross profit margin of Home Depot will be increasing in every
year and net sales of the company increasing as well. This can show that
that Home Depot will collect more revenue in the future and this will be the
positive sign for the company .

Earning before Income Tax is also increasing in every year that shows that
company will increase their earnings and reduce their operating cost to earn
maximum profit. Increasing EBIT Ratio is also a good and positive sign for
the company.
Net Operating Profit After Tax is improving every year it means the
company will earn more profit in 2006 rather than existing year but this will
only be possible if the company will control their expenses and minimize
their cost to attain more profit.

Receivable, inventory and property and equipment turnover are all

decreasing which is positive from working capital cycle as the company will
have more cash inflows in future, which would also ensure stable current
and quick ratios as well.

Payable turnover will stand at 9.4% through out which means Home
Depot will maintain the same payable time as before.
Return on capital will end up at 16% from 15.2% which is very good for
existing shareholders as they will be getting higher returns, it will also
boost their confidence for future investment in Home Depot
 CONCLUSION
After seeing the 5 years financial forecasting of Home Depot I can
conclude that Home Depot will be in a good position in coming years
rather than existing years.. It will turn good position into a very good
position in next five years. But the most important point is this financial
forecasting will only be true when Home Depot will be working in a same
road map and all the other factors remain constant because if they will not
maintain their position then this will be difficult to attain the position that
was discussed in 5 years financial forecasting.