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PRESENTED BY-

SHIVI MITTAL (41)


SHWETA MISHRA (43)
PANKAJ KUMAR (44)
SOURAV MOHANTY
(46)
COMPANY
BACKGROUND

• Together with the help of New York investment banker Ken


Langone, who assembled a group of investors, and
business partner Blank & Marcus launched the highly
successful home-improvement retailer, Home Depot, in
1979.
• Marcus was the company's first CEO for 19 years and
served as chairman of the board until his retirement in
2002.
• Blank spent 19 years as the company's chief financial
officer before succeeding Marcus as CEO. Blank retired
from the company in 2001 as co-chairman.
History of the Home Depot
• 1978: Founded by Bernie Marcus and Arthur
Blank; zero locations; 20 associates
• 1979 : 3 store location; 200 associates; $7
million in sales
• 1980 : 4 stores; 300 associates; $22 million
in sales
• 1981: Stock goes public on NASDAQ, raising
$4.1 million; 8 stores; 700 associates;
$51 Million in sales
• 1984: Moved to the New York Stock
Exchange (NYSE) in
• 1986: Sales exceed $1 billion; 60 stores
3
• Q1-Evaluate Home Depot’s
business strategy. Do you
think it is a viable strategy in
the long run?
STRATEGIC ANALYSIS
The Home Depot Pioneered the Concept of
Warehouse Retailing in the Home Centre
Industry. The Company’s Strategy Consists of:

1. Focusing on the Do-It-Yourself Segment of the


Market (which grew 14% in last 15 years);
2. Keeping Costs through Low Overhead, Purchase
Discounts, and High Turnover;
3. Attracting Customers through Aggressive
Advertising and Competitive Pricing;
4. Providing High Service to the Target Customer
Group through Well-Trained Employees and Well-
Stocked Stores.
Opportunities
•International expansion
•Consumer interest in one-stop shopping to save time and gas
money
•Growth in global sourcing
•Hardware stores, home centers, and retail-oriented
lumberyards, industry expected to grow (from $236.3 billion in
2004 to $281.7 billion by 2008)
•Slow housing sales (people are likely to stay home and spend
money on remodeling and on improvements to make a home
more attractive to purchase)
•The growing number of woman who are making home
improvement decisions and spending an increasing amount of
time on DIY (do-it-yourself) projects
6

®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker


Threats
• Competitors(Builders
Square,Mr.HOW,Hechinger Co.)
• Reaching market saturation within North
America
• Contractor shortage causing backlog in
home remodeling
• Overlap between Home Depot and other
stores in competetion.

®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker


Strengths
• #1 home improvement retailer in the
world
• Profits climbed 16% and revenues
climbed 13% in for the fiscal year 2004
• Innovative methods of differentiating
• Dominant in the lumber and building
materials industry
• Distinctive product range
• Efficient business model

®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker


Weaknesses
• Rising expenses
• Store layout and appearance
• New store productivity remains weak
• Revenue growth is slower than
industry average and Hechinger’s.

®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker


• The Home Depot was careful not to sacrifice the depth of
merchandize and quality of product offered for sale.

• To ensure the right product were stocked at all times , every


product sold by The Home Depot was guaranteed by either the
manufacturer or by company.

• From this modest beginning the company grew rapidly and


public in 1981. the company’s stock initially traded over the
counter and was listed on NEW YORK STOCK EXCHANGE in April
1984.

• The company grew from 3 in 1979 to 50 by the end of fiscal


year 1985.
SOMETHING ABOUT FUTURE &
ISSUES
• Fiscal year 1985 was the most important in
the company’s seven year history. During
1985 the company implemented its most
ambitious expansion plan to date by 20 new
stores in 8 new market.

• As fiscal year 1985, came to a close, the


company faced some critical issues:
1. The competition was heating up.
2. Pressure on margins
3. Only the most strongest and capable firm in
the industry was expected to survive
• The company needed significant additional financing to
implement its plans.
• The company relied external financing both debt and
equity to fund its growth in 1984-85.
• The significant drop in its stock price in 1985 made
further equity financing less attractive.
• Cash and interest coverage requirements were
required to maintain sustainable growth.
• 2-Analyze Home Depot’s financial
performance during the fiscal years
1983-1985.
Compare Home Depot’s
performance in this period with
Hechinger’s performance.

13

®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker


Financial Analysis…
• Profitability Analysis
– ROE
– ROS
– Asset Turnover
– Financial Leverage
• Cash Flow Analysis
– Operating
– Investing
– Financing
Ratio Analysis
Ratio Analysis
Ratio Analysis
Ratio Analysis
Ratio Analysis
Fiscal Year 1983 1984 1985

Return on Sales

Return on Sales (%) 4.0 3.3 1.2

= Gross Margin (%) 27.3 26.4 25.9

- SGA/Sales (%) 20.8 20.6 23.2

- NIE/Sales (%) - (0.3) 1.2

- Tax Expense/Sales (%) 3.4 2.8 0.5


Ratio Analysis
COMMON SIZE INCOME STATEMENT    
        % increase or decrease
  2-Feb-86 3-Feb-84 29-Jan-83 2-Feb-86 3-Feb-84
 
Net Sales (note 2) 100.00% 100.00% 100.00% 62% 69%
COGS 74.10% 73.58% 72.67% 63% 71%
Gross Profit 25.90% 26.42% 27.33% 59% 63%
Operating Expense          
Saling and operating expense 19.17% 17.20% 16.99% 80% 71%
Preopening expense 1.07% 0.44% 0.96% 292% -22%
G&A expense 2.93% 2.96% 2.88% 60% 74%
Total operating expense 23.18% 20.61% 20.82% 82% 67%
Operating Income 2.72% 5.81% 6.51% -24% 51%
Other Income (expense)          
net gain on disposition of property and  0.19% 0.00% 0.00%    
equipment(note 7)
Interest income 0.21% 1.21% 0.95% -72% 116%
Interest expense (note 3) -1.46% -0.95% -0.04% 148% 3863%
  -1.06% 0.26% 0.90% -765% -52%
EBT 1.66% 6.07% 7.41% -56% 38%
Tax (note4) 0.49% 2.80% 3.41% -72% 39%
net earning 1.17% 3.26% 4.01% -42% 38%
Ratio Analysis
Ratio Analysis
Fiscal Year 1983 1984 1985

Working Capital Ratios

Days’ Inventory 75 82 83
(365*AVG Inventory/Cost of Sales)

Days’ Receivables 3 8 4
(365*Accounts Receivables/Sales)

Days’ Payable 35 34 33
(365*Accounts Receivables/Purchases)
Cash Flow Analysis
($000) 1983 1984 1985
Net Earnings 10261 14122 8219
Depreciation and Amortization 903 2275 4376
Deferred Income Taxes 713 1508 3612
Goodwill Amortization 93 637

Net Gain in Disposals (1317)

Other 180

Increase in Receivables (1567) (7170) (15799)


Increase in Inventories (41137) (25334) (68654)
Increase in Prepaid Expenses (227) (1206) (587)
Increase in Accounts Payable 17150 10505 21525
Increase in Accrued Expenses 2865 2731 5314
Increase/(Decrease) in Income Taxes Payable 406 (657) (626)
Cash from Operations (10574) (3056) (43120)
Cash Flow Analysis
($000) 1983 1984 1985

Cash from Operations (10574) (3056) (43120)

Addition to Property and Equipment (16081) (50769) (99767)

Disposals of Property and Equipment 3 861 9469

Other (252) (2554) (1728)

Cash before Investments, Dividends, and External (26904) (55518) (135146)


Financing

Acquisition of Bowater (29193)

Cash before Dividends and External Financing (26904) (84711) (135146)

Dividends

Cash before External Financing (26904) (84711) (135146)


Cash Flow Analysis
($000) 1983 1984 1985

Cash before External Financing (26904) (84711) (135146)

Increase in Current Portion of Long-Term Debt 10 233 10095

Repayment of Long-Term Debt (52) (6792) (10399)

Proceeds from Long-Term Borrowings 4200 120350 92400

Proceeds from Sale of Common Stocks 36663 814 659

Cash from External Financing 40821 114605 92755

Net Change in Cash 13917 29894 (42391)


3-How productive were Home
Depot’s stores in the fiscal
years 1983-1985?

26

®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker


Home Depot’s
Store Productivity
Home Depot’s
Store Productivity
Home Depot’s
Store Productivity
Home Depot’s
Store Productivity
Home Depot’s
Store Productivity
Home Depot’s
Store Productivity
Home Depot’s
Store Productivity
Home Depot’s
Store Productivity
Home Depot’s
Store Productivity
• 4-Home Depot’s stock price dropped by 23%
between January 1985 and February 1986,making it
difficult for the company to rely on equity capital to
finance its growth. Covenants on existing debt
restrict the magnitude of the company’s future
borrowing. Given these constraints what specific
actions should Home Depot take with respect to its
current operations and growth strategy? How can
the company improve its operating performance?
Should the Company change its strategy? If so,
how?

36
Problems with the
company…
• The Company Has a Negative Cash Flow from Operations in Each
of the Three Years.

• The Significant Investment in Property and Equipment was the


Second Reason for the Company’s Cash Deficit.

• The company was not able to finance its cash need in the year
1986.

• The company had got very high financial leverage thereby


causing a high interest expenditure.
Possible reasons of these
problems
• The company was expanding fast, and in order to do so it lost
partial control over its operating expanses which causes negative
cash flow from operation.

• From January 2nd 1985 to February 3rd 1986, the Home Depot’s
stock price fell by 23.4%, which suggest that issuing new equity
may not fetch enough cash to the company.

But it will certainly dilute the EPS severely, so issuing equity to


finance its cash need would not have been a wise decision.

• The company largely depend on the borrowings to finance its cash


need in those three years, which drove its leverage very high.

• Expansion in new markets needs…


– aggressive pricing and promotions adversely affected gross margins
– heavy spending on advertising adversely affected operating expenses
– time to achieve critical mass adversely affected asset turnover
The constrains to the
company
• According to covenants on existing debt the
total interest expanding should not exceed
50% of EBIT (means its interest coverage
ratio should not be less than 2), which
restricts its debt taking capacity as it already
a paying about 46% of EBIT as interest on
debt.

• Decreasing EPS and ROE of the company


made its equity financing less attractive, as
it can not fetch enough cash and also would
further dilute the EPS.
Suggestions
• Given the level of current performance, the previous
analysis shows that it is difficult to rely exclusively on
debt financing to fund its planned expansion.

• Another option worth considering is to sell and lease


back some of the Home Depot’s fixed assets:

– Management states in its letter to shareholders that it is


considering this option to raise $50million.

• A third option is to issue equity, but it will severely dilute


the ownership interests of current shareholders.
Suggestions
• The another option for the company is to improve
the company’s cash flow from operations by
controlling on its operating expenses.

• If company is successful in improving operational


cash flow than it can come out of this bad
situation.

• So company should try to cut down the operating


cost instead of think to change the strategy.