home depot presentationfinal

PRESENTED BY-SHIVI MITTAL (41)

SHWETA MISHRA (43) PANKAJ KUMAR (44) SOURAV MOHANTY

(46)

• 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.

COMPANY BACKGROUND

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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

• Q1-Evaluate Home Depot’s business strategy. Do you think it is a viable strategy in the long run?

STRATEGIC ANALYSISThe 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.

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

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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


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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.


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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


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Weaknesses

• Rising expenses• Store layout and appearance• New store productivity remains weak• Revenue growth is slower than

industry average and Hechinger’s.

• 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 margins3.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.


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• 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.

Financial Analysis…

• Profitability Analysis– ROE– ROS– Asset Turnover– Financial Leverage

• Cash Flow Analysis– Operating– Investing– Financing

Ratio Analysis

Ratio AnalysisFiscal 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 AnalysisCOMMON 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 equipment(note 7) 0.19% 0.00% 0.00% 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 AnalysisFiscal Year 1983 1984 1985

Working Capital Ratios

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

75 82 83

Days’ Receivables(365*Accounts Receivables/Sales)

3 8 4

Days’ Payable(365*Accounts Receivables/Purchases)

35 34 33

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 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 Financing

(26904) (55518) (135146)

Acquisition of Bowater (29193)

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

Dividends

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


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)


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

Home Depot’s Store Productivity

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• 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?

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.

home depot presentationfinal

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