Table of Contents INTRODUCTION................................................... 1 STRATEGIC ANALYSIS............................................. 1 Home Improvement Industry...........................................1 Industry Analysis: Porter’s Five Forces.............................1 Company Strategy....................................................4 Home Depot SWOT Analysis............................................4 ACCOUNTING ANALYSIS............................................5 Accounting Policies.................................................5 Potential Red Flags and Biases......................................8 FINANCIAL ANALYSIS............................................10 Condensed Balance Sheet Assumptions and Analysis...................10 Ratio Analysis.....................................................12 Prediction of Bankruptcy...........................................16 Cross-Sectional Analysis...........................................16 FORECASTING................................................... 18 Income Statement Assumptions.......................................18 Forecasted Income Statements.......................................20 Balance Sheet Assumptions..........................................20 Forecasted Balance Sheets..........................................22 VALUATION..................................................... 22 Cost of Equity Assumptions.........................................22 Plain Vanilla Abnormal Earnings Valuation Results..................23 Sensitivity Analysis...............................................23 Abnormal Earnings Valuation with ROE Mean Reversion................24 RECOMMENDATION................................................ 25 APPENDIX...................................................... 27 Appendix 1 –Consolidated and Condensed Balance Sheets..............27 Appendix 2 –Consolidated Income Statements.........................28 Appendix 3 – Consolidated Cash Flow Statements.....................29 Appendix 4 – Altman’s Z-Score Calculation..........................30 Appendix 5 - Plain Vanilla AEV.....................................31
Transcript
Table of Contents INTRODUCTION..............................................................................1STRATEGIC ANALYSIS....................................................................1
Home Improvement Industry................................................................1Industry Analysis: Porter’s Five Forces.................................................1Company Strategy...............................................................................4Home Depot SWOT Analysis.................................................................4
ACCOUNTING ANALYSIS.................................................................5Accounting Policies..............................................................................5Potential Red Flags and Biases.............................................................8
FINANCIAL ANALYSIS...................................................................10Condensed Balance Sheet Assumptions and Analysis...........................10Ratio Analysis....................................................................................12Prediction of Bankruptcy....................................................................16Cross-Sectional Analysis....................................................................16
FORECASTING..............................................................................18Income Statement Assumptions.........................................................18Forecasted Income Statements..........................................................20Balance Sheet Assumptions................................................................20Forecasted Balance Sheets.................................................................22
VALUATION.................................................................................22Cost of Equity Assumptions................................................................22Plain Vanilla Abnormal Earnings Valuation Results..............................23Sensitivity Analysis............................................................................23Abnormal Earnings Valuation with ROE Mean Reversion.......................24
Appendix 1 –Consolidated and Condensed Balance Sheets...................27Appendix 2 –Consolidated Income Statements.....................................28Appendix 3 – Consolidated Cash Flow Statements................................29Appendix 4 – Altman’s Z-Score Calculation..........................................30Appendix 5 - Plain Vanilla AEV............................................................31Appendix 6 – Optimistic Scenario Forecast and AEV.............................31Appendix 7- Pessimistic Scenario Forecast and Valuation....................33Appendix 8 – AEV with ROE Mean Reversion........................................35
INTRODUCTIONThe Home Depot (“Home Depot”) is one of the most well-known companies in the home improvement industry. Founded in 1978, the company grew rapidly to become the world’s largest home improvement retailer. With more than 2200 stores across North America, Home Depot has become the most popular one-stop shop for both do-it-yourself home improvement consumers as well as construction professionals. Each retail store carries a variety of branded as well as generic home improvement products, building materials, and garden products. The stores also offer home improvement and installation services. Home Depot has been extremely successful to date and during the last financial year alone, the retail giant brought in profits exceeding 6 billion US dollars.
STRATEGIC ANALYSISHome Improvement IndustryHome Depot belongs to the home improvement industry; the industry's value chain is divided into three major parts: Manufacturing, Distribution, and Installments. The manufacturing arm produces building materials and building products. Building materials are elements that are vital to the structure of the building such as lumber, concrete, doors and windows. Building products are modular items not critical to the structural integrity of the building; they include items like hardware, heating ventilation and air conditioning (HVAC), systems and flooring.
The distribution chain is dominated by retailers that include: Home Depot, Lowes, Walmart and Sears. Smaller hardware stores, garden centers, plumbing, and electrical supplies stores provide competition in their specialized end of the market. These retailers have three major sets of consumers: Do It For Me (DIFM) where they provides installation services for customers, Do It Yourself, and Professionals.
Industry Analysis: Porter’s Five ForcesInternal Rivalry: High
The home improvement industry is an extremely competitive industry. The industry is dominated by two major firms that focus exclusively on selling home improvement products while multipurpose retailers like Walmart and Sears often sell home improvement products as well. There is little differentiation among the offering of major players in the industry which puts massive pressure on prices. The extreme price pressure often motivates retailers to offer promotional deals to gain more market share. These deals involve deep discounting where prices are often slashed well below standard prices in order to increase customer visits during recessions. The low switching costs that the industry was famous for appears to be
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disappearing with the introduction of private label cards which allows retailers to offer customers discounts based on spending. Customers will be encouraged to spend more with their current retailers than their competitors to accumulate points that will lead to a discount on their future purchase. The big players also have to compete with specialized and independent hardware stores. The locality also plays an important factor in this industry as consumers are more likely to visit stores that are conveniently located. Little diversification and concentrations makes the rivalry in this industry intense.
Threat of New Entrants: Low
There is also a lack of product differentiation among the major players in the industry which leads to intense competition. This competition will be a deterrent to potential entrants that might not have the capital to compete with the major players. The competitive pressure in the industry has also severely reduced profit margins, when margins are low few entrepreneurs will want to enter the industry. Relationships between suppliers and retailers could also act as a deterrent to new entrants. Retailers will enjoy tremendous benefits from manufacturers they have been dealing with over time; they are more likely to receive better credit terms and discounts which increases their ability to reduce prices. Large incumbents enjoy the economics of scale and scope; they can get discounts by buying in bulk and they can offer consumers a better value proposition through offering consumers a wide variety of goods that new entrants will not be able to provide. New entrants could often enter the market only if the specialize in producing a single category of products. The overall threat from new entrants is relatively small as they face many barriers to entry.
Threat of Substitutes: Low
The use of professional services of builders, painters and other tradespeople can act as a possible substitute to the home improvement offering. Consumers might opt for these services because they might not have the time or the know-how in selecting specialized item to buy or how to install certain items. These professionals have the know-how and can save consumers the stress and thus poses a threat to home improvement retailers. However, these professionals buy most of their specialized items from retailers that constraints the threat these professionals pose. The threat of substitutes appears to be weak or inexistent in this market.
Bargaining Power of Buyers: Medium
The home improvement industry comprises of a large number of consumers that have little financial strength. The size of customers and the presence of several alternative could mean that buyer power in the industry is quite high. There seems to be no financial penalty for switching between competitors, however, the introduction of private label cards has imposed an artificial switching cost. These private cards are linked with loyalty programs; a customer might opt out of switching due to repayments of credit card debts with existing company and
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the fear of higher borrowing costs from switching to a new business. Personal debt levels mean buyers across the board are price sensitive as more of income is used to servicing debt. There is no threat of backward integration due to the small financial strength of buyers. The sheer size of consumers makes it difficult for them to organize in groups which means they can't influence the price to fall any further.
Customers enjoy intense competition and low switching costs. However, the size of customers and their inability to organize groups reduces their bargaining power. Thus, the bargaining power of consumers in this industry is medium.
Bargaining Power of Suppliers: Low
Suppliers are divided into two categories: manufacturers and employees. Manufacturers in this industry are well diversified; they vary in size ranging from large firms like Black and Decker to small independent companies. Manufacturers attempt to persuade retailers to carry their brand of products. The high number of suppliers reduces the bargaining power of vendors means there is intense competition among suppliers which reduces their bargaining power. Manufacturers are often forced to absorb a rise in the costs of labour and raw materials because retailers are unwilling to accept an increase in price by manufacturers as they do not want to pass the cost to consumers. Retailers with the help of some suppliers produce private-label products with the aim of competing with branded products. This will improve the bargaining power of retailers. Manufacturers can forward integration through setting up proprietary stores and utilizing the internet to sell their products online to reduce dependence on retailers.
Retail associates are known to have a high turnover due to the intense competition for talent in the industry that gives employees bargaining power when negotiating wages. It could take a new employee a long time to gain the customer service skills which is vital for success in this industry.
The power of suppliers in this industry is low as the manufacturers absorb any increases in costs of goods sold and also face competition from the retailer's brand. Although employees do have significant bargaining power.
Company StrategyHome Depot follows a cost leadership strategy and emphasizes productivity and efficiency especially within its supply chain. The company uses advanced forecasting and replenishing technology that allows it to maintain optimal levels of inventory and meet product demand without tying up an excessive amount of investment in inventory. It also keeps other expenses
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low by leveraging the economies of scale and scope that come with its size. The company then passes these costs savings on to its customers in the form of affordable prices.
While companies pursuing a cost leadership strategy often sell a limited number of products to its customers, Home Depot is different as it carries a large product offering at each of its stores. By minimizing costs on its operational side, Home Depot is able to continue offering low prices to customers without compromising product variety or quality. The everyday low prices as well as the one stop-shop experience available at Home Depot stores then help the company attract customers and protect market share.
Home Depot SWOT AnalysisStrengths
Home Depot has many strengths and one of these strengths is its strong brand name. Because the company is so well-known, it is the go to store for many consumers who are purchasing home improvement products for the first time. In addition to easily attracting new customers, Home Depot also retains customers effectively as it offers consumers a wide variety of products at affordable prices as well as excellent customer service. The company also has a strong sourcing program that allows it to access suppliers from around the world. This program, as well as its position as a retail giant, gives Home Depot high bargaining power over most suppliers and keeps its costs of good sold low.
Weaknesses
Because Home Depot’s products are considered consumer discretionary goods, the company’s sales are very dependent on the performance of the home improvement industry as well as the economy in general. As a result, sales figures are often quite variable as they increase with economic booms and decrease during recessions. Another weakness would be the lack of differentiation between Home Depot and its competitors. While Home Depot is the exclusive retailer for a few brands like Husky, Everbilt, and Diablo, most of the company’s products are also available at other home improvement retailers like Lowe’s. This lack of differentiation leads to price competition between the retailers and as a result, profitability suffers. Finally, Home Depot is currently facing some lawsuits from a data breach that occurred during 2014 and these lawsuits take up a lot of company resources that could have been used productively otherwise.
Opportunities
Two areas of opportunities exist for Home Depot. First, online shopping has increased significantly in popularity over the last few years. For instance, the volume of US B2C e-commerce sales has grown from 424 billion back in 2010 to over 700 billion in 2014. Therefore, Home Depot should take advantage of this additional sales channel and increase the amount of products available for purchase on its website. Second, Home Depot should consider
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international expansion. For instance, there is a large demand for home improvement products in Europe. According to the European Home Improvement Monitor, more than 245 billion euros were spent on these products in the first six months of 2013 alone. By entering new markets such as Europe, Home Depot will be able to increase its revenues by expanding its customer base.
Threats
Home Depot’s largest threat is its competitors. Since little differentiation exists between the products offered by various home improvement retailers, there is heavy competition and The Home Depot is forced to offer consumers low prices in order to keep its market share. Other threats include the possibility of an interest rate hike. Many analysts speculate that this may occur in the near future and it could potentially lead to a downturn in the housing markets as mortgage rates would also increase, making it more difficult for consumers to take on or maintain their mortgages. As a result, there would be a decrease in construction projects which would ultimately be damaging to Home Depot’s sales.
Home Depot is a retailer of home improvement and decorating products and merchandise inventories is the second biggest asset on the company’s balance sheet – about $11 billion. The accounting method used to record about 75% of the company’s inventories is the lower of cost (first-in, first-out) or market, as determined by the retail inventory method. The inventory retail value is adjusted regularly to reflect market conditions, hence, the inventory valued using the retail method approximates the lower of cost or market. The remaining approximately 26% of inventories includes operations in Canada and Mexico, and distribution centers which record Merchandise Inventories at the lower of cost or market, as determined by a cost method. The company assess the inventory valued using a cost method at the end of each quarter to ensure it is carried at the lower of cost or market. The company states that the valuation allowance for inventories valued under a cost method was not material to the financial statements and does not disclose an amount.
Independent physical inventory counts are taken on a regular basis in each store and distribution center to compare it with the amount on the consolidated financial statements. The company estimates and accrues for potential losses due to shrink (theft, loss, inaccurate records for the receipt of inventory or deterioration of goods) on a store-by-store basis based on recent shrink results and current trends in the business. The company states that actual
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shrink results did not differ materially from estimated for 2014, 2013 and 2012, but did not disclose an amount.
Lowe’s records inventory using the same the same lower of cost and market method, however, Lowe’s, unlike Home Depot, also discloses what components are used in calculating cost. Overall, Home Depot could have provided more information regarding inventory write-downs and reversals, etc.
Revenue Recognition
Revenue is recognized net of estimated returns and sales tax at the time the customer takes possession of products or receives services. The allowance for sales returns is estimated based on historical return levels. Amount received for merchandise and service not yet received by the customer is recorded as Deferred Revenue. Deferred revenue is also recorded for sale of gift cards and this revenue is recognized when gift cards are redeemed.
Sales balance on income statement also includes services revenue generated through installation, home maintenance and professional service programs. The customer selects and purchases material for a project and the Company provides or arranges professional installation. Under certain programs, when the Company provides or arranges the installation of a project and the subcontractor provides material as part of the installation, both the material and labour are included in services revenue. The Company recognizes this revenue when the service for the customer is complete. Services revenue was $3.8 billion, $3.5 billion and $3.2 billion for fiscal 2014, 2013 and 2012, respectively.
Long-Lived Assets
Home Depot evaluates its Long-Lived Assets each quarter for any indications of potential impairments in their value, which include the decision to relocate or close a store or other location before the end of its previously estimated useful life and/or when changes in other circumstances indicate the carrying amount of an asset may not be recoverable. In addition, the test conducted by Home Depot to test the potential impairment of a specific asset includes comparing the future “undiscounted” expected cash flows of the asset to its current carrying value on the Balance Sheet. Specifically, the analysis of the “undiscounted” expected cash flows of an asset includes Management’s assumptions of cash inflows and outflows directly resulting from the use of the specific asset in operations. Furthermore, considerations include assumptions about the Gross Profit Margin on Net Sales, Payroll and Related Items, Occupancy Costs, Insurance Allocations, and Other Costs needed to operate an individual store. Consequently, if the carrying value is greater than the “undiscounted” expected cash flows, an impairment charge is recognized on the financial statements based on the difference between the carrying value and the estimated fair market value. In the instance that an impairment loss needs to be recognized, it is recorded as a component of Selling, General & Administrative
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Expenses on the Income Statement. Also, when a leased location is closed, the net present value of future lease obligations less sublease income is recognized in Selling, General & Administrative Expenses. In addition, the variables that are used to assess the viability of recovering the value of a Long-Lived Asset are consistent with the assumptions used for Lowe’s.
There are significant amounts of assumptions that are built into assessing whether an asset should be impaired. The analysis of expected cash flows for a specific asset includes projections several years into the future, with assumptions regarding key variables including future sales growth, operating margin growth rates, economic conditions, market competition, and inflation. Furthermore, Home Depot has identified that the threshold for an impairment charge is a 10% decrease in the “undiscounted” expected cash flows or sublease income. Furthermore, when comparing this threshold to Lowe’s, there is a slight divergence. In the case of Lowe’s, and impairment charge is recognized if there is a 10% decrease in projected Sales that are used to estimate “undiscounted” expected cash flows. This assumption does not take into account the other sources of losses that could arise, such as increasing in operating costs, which the Home Depot model does. As such, the Home Depot method for impairment is a more comprehensive and inclusive model.
Goodwill & Other Intangible Assets
It is also important to look at the accounting policies elected to deal with Goodwill & Other Intangible Assets, but this is not specifically disclosed in the Lowe’s financial statements. Home Depot does not amortize Goodwill, but assess the recoverability in the third quarter of each fiscal year. Furthermore, a qualitative analysis is conducted to assess if the carrying amount exceeds the fair value of the assets, and if so, a quantitative assessment is conducted to put a numerical value on it. In conclusion, there is a quantitative analysis that is conducted at least once every three years.
Self-Insurance
Home Depot operates in the Home Improvement Products & Services Retail, and as such, one major component of the business model, is their employees. These line items represent a substantial portion of Balance Sheet, and as such, Home Depot has established liabilities for certain types of losses from general (and product) liabilities, workers’ compensation, employee group medical and automobile claims. The retention for each claims include $25mn (general liabilities), $1mn (workers’ compensation), and $1mn (automobile liabilities). Furthermore, these liabilities are calculated (and presented) at the estimated ultimate cost of for the claims incurred at the date of the Balance Sheet. These estimated liabilities are not discounted and are established based upon analysis of historical data and actuarial estimates. Furthermore, these liabilities are reviewed by Management and third-party actuaries on a regular basis to ensure accuracy. In comparing these assumptions to the ones used in the financial statements of
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Lowe’s, it is evident that the assumptions are in-line with industry practices. Furthermore, the threshold that would cause a material impact on the operations of Home Depot is not disclosed in the financial statements.
Share Repurchase
Home Depot has been buying back company shares under the share repurchase program since 2002 has spent over $34.55 billion in purchasing shares. The company entered into several Accelerated Share Purchase Agreements (ASR) during 2012-2014 and has spent another $11.95 billion. The financing for these agreements is being done through debt issuance and operating cash flows. Home Depot is buying back shares as they are a mature company and don’t have many opportunities for expansions or acquisitions. Home Depot is taking advantage of debt financing due to reduced interest rates as well as higher operating cash flows due to improving house market. The repurchased shares are being recorded as treasury stock with no voting rights and are not part of outstanding shares. Repurchasing shares can help Home Depot maintain a controlling interest within the company to prevent hostile takeovers. Also, by reducing outstanding shares, the Earnings per Share and Price-to-Earnings ratios will also improve. The remaining shareholders will also have more earnings allocated to their shares.
Potential Red Flags and BiasesChoice of GAAP
Home Depot uses U.S. GAAP for reporting purposes and is listed on the New York Stock Exchange. U.S. GAAP is more rules-based and therefore, reduces the degree of judgment in applying accounting standards compared to IFRS which is more principles-based. This can help in reducing manipulations of balances. However, rules-based standards can also be too rigid and may prevent financial reports from displaying the true economic condition of the firm due to the strict application of rules.
Litigation & ‘Data Breach’
Between April and September of fiscal 2014, Home Depot had its payment data systems breached, which potentially impacted customers who used payment cards at self-checkout systems in the Company's U.S. and Canadian stores. The investigation is ongoing. This is red flag because the potential costs and liability related to the litigation will be material and significant according to the company, however, due to the lack of probability and reasonable estimation of the amount currently, Home Depot has no provisions recorded yet. This could distort financial statement comparison in future years and also impact stock price and earnings.
In 2014, the Company recorded $63 million of expenses related to the as well as $30 million of expected insurance proceeds for costs the Company believes are reimbursable under its insurance coverage – net expenses of $33 million recorded in SG&A expenses in the income
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statement for 2014. Expenses include costs to investigate the Data Breach, provide identity protection services to impacted customers and pay legal and other professional services. At February 1, 2015, the company had accrued liabilities of $12 million and insurance receivable of $20 million on its books.
Home Depot expects the payment card networks will make claims against the company. The final amount of these claims will probably consist of amounts for incremental counterfeit fraud losses and non-ordinary course operating expenses (such as card reissuance costs). In order for Home Depot to have liability for such claims, it would have to be determined that at the time of the data breach, the portion of the company’s network that handles payment card data was noncompliant with applicable data security standards, and the alleged noncompliance caused at least some portion of the compromise of payment card data that occurred during the Data Breach. An independent third-party assessor found the portion of the company’s network that handles payment card data to be compliant with applicable data security standards in the fall of 2013, and the process of obtaining such certification for 2014 was ongoing at the time of the Data Breach. However, in March 2015 the forensic investigator working on behalf of the payment card networks alleged that the company was not in compliance with some of those standards at the time of the Data Breach. As a result, Home Depot expects it is probable that the payment card networks will sue and the company will have to decide whether to litigate or settle those claims. At this time, Home Depot believes that settlement negotiations will happen and it is probable that the company will incur a loss in connection with those claims. Also, lawsuits have been filed in courts in the U.S. and Canada, and other claims may be made against the company on behalf of customers, shareholders or others. In addition, several state and federal agencies, including State Attorneys General, are investigating the Data Breach and the company may incur fines or other obligations. The company is not able to estimate the range of costs because the investigations are in the early stages, and the company has not recorded an accrual for litigation, claims and governmental investigations related to these matters in fiscal 2014. An estimate for losses will be recorded at the time it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. The Company believes that the final amount paid on payment card network claims could be material to the Company's consolidated financial condition, results of operations, or cash flows in future periods.
In addition, the company expects to incur significant legal and other professional services expenses related to the Data Breach in future periods and will record them as services are received. The company has also taken another $100 million insurance policy on top of its current one to cover these potential costs.
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Overall, the Home Depot Data Breach is a significant event that affected millions of customers in two countries. The potential expenses arising from the lawsuits, legal and consulting fees, insurance, fines and remediation of current weaknesses will be significant. Therefore, this is a red flag as it will impact the company’s financial statements, profitability, stock price and future forecasts.
Deferred Revenues (Gift Cards)
As stated under revenue recognition accounting policy, gift card sales are recorded as deferred revenue and realized as revenue upon redemption. Gift card breakage income is recognized for the value of gift cards for which the Company believes the probability of redemption by the customer is very low and is based upon historical redemption patterns. The Company recorded $32 million, $30 million and $33 million of gift card breakage income during 2014, 2013 and 2012, respectively. This income is realized as a reduction in SG&A expenses. Even though, the amount is not material, this could be a potential red flag as this allowance can be manipulated to reduce expenses which will have an impact on profits. It is a red flag also because it an estimate and does not represent the exact value of gift cards not redeemed.
Home Depot does not disclose the amount of deferred revenue from unredeemed gift cards or the method used in estimating gift card breakage income, unlike Lowe’s which does.
Disclosure
Overall, Home Depot meets the minimum requirements for disclosure as per U.S. GAAP but does not go above and beyond those requirements. There are many qualitative and quantitative disclosures as discussed in the accounting policies and red flags that Home Depot could have provided. Its main competitor Lowe’s, on the other hand, does provide more disclosures; therefore, there is no reason to believe that Home Depot’s lack of detailed disclosure is for competitive purposes.
FINANCIAL ANALYSISCondensed Balance Sheet Assumptions and Analysis
CONDENSED BALANCE SHEET (amounts in millions)
Fiscal Year Ended: 01-Feb-15
02-Feb-14
03-Feb-13 29-Jan-12
30-Jan-11
Net Operating Working Capital
4,361 4,563 5,231 5,174 4,399
Net Long-Term Assets 22,158 22,683 23,342 23,512 24,239
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Net Assets 26,519 27,246 28,573 28,686 28,638
Net Debt 17,197 14,724 10,796 10,788 9,749Shareholders' Equity 9,322 12,522 17,777 17,898 18,889Net Capital 26,519 27,246 28,573 28,686 28,638
Cash and Cash Equivalents
The ‘cash and cash equivalents’ balance is decreasing. Most of the cash flow from operations is being used in repurchasing stock, so there’s no need to separate into operating and financial cash. By separating into financial cash, Net Debt will be distorted.
Net Operating Working Capital
Net OWC is calculated by deducting net operating liabilities from net operating assets. Net OWC is positive but decreasing since 2012, and is the lowest in the past five years.
Net Long-Term Assets
Net long-term assets are calculated by adding together Goodwill, Property and Equipment and long-term Other Assets and deducting Long-term liabilities and Deferred income taxes. Net LT assets have been decreasing for the past five years primarily due to decrease in Net Property and Equipment.
Adding Net long-term assets and Net operating working capital gives Net Assets which is similar to Total Assets on a regular balance sheet. Net assets are decreasing due to decrease in net OWC and LT assets.
Net Debt
Net Debt is calculated by adding short-term debt, and current and long-term portions of debt. Net debt is increasing since Home Depot is borrowing money to finance its share repurchase program by taking advantage of historically low interest rate.
Shareholders' Equity
Shareholders’ equity is decreasing since the company is buying back shares as a result of their share repurchase program since 2002. The company renewed their commitment and signed a new share repurchase program in 2014; therefore, shareholders’ equity will be decreasing further.
Net Capital is obtained by adding together Net Debt and Shareholders’ Equity and is equal to Net Assets.
Current Ratio 1.36 1.42 1.34 1.55 1.33Quick Ratio 0.28 0.31 0.34 0.34 0.16CFO/CL Ratio 0.73 0.71 0.61 0.71 0.45
Solvency Ratios:
D/E Ratio 1.84 1.18 0.61 0.60 0.52Net D/E (same as Net Financial Leverage) 1.84 1.18 0.61 0.60 0.52Liabilities/Assets 0.77 0.69 0.57 0.56 0.53
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Coverage Ratios:
Interest Coverage (EBIT/Interest Expense) 21.24 13.11 14.25 11.23 10.32Interest Coverage using cash flows 25.08 16.32 18.73 15.90 12.52Capex Coverage (assume Capex =negative of Cash from Investing)
0.15 0.20 0.21 0.17 0.22
Profitability Ratios:Operating Return on Assets
Operating ROA is obtained by dividing Net operating profit after tax with Net assets. Operating ROA is increasing because Net earnings are increasing and Net assets are decreasing.
Net Borrowing Cost
Net borrowing cost is decreasing since Net interest expense after tax is decreasing and net debt (denominator) is increasing. Interest for fiscal 2014 decreased despite increase in net debt because of a pre-tax gain of $323 million related to the sale of a portion of equity ownership in a subsidiary - HD Supply. This partially offset the additional interest expense from $2 billion of long-term debt issued in June 2014.
SPREAD
Spread is the difference between Operating ROA and Net borrowing cost. Spread has been increasing for the past five years because operating ROA is increasing and net borrowing cost is decreasing.
Net Financial Leverage
Leverage is calculated by dividing net debt with shareholders’ equity. Leverage is increasing because net debt is increasing and shareholders’ equity is decreasing. Debt is increasing because Home Depot is taking advantage of low interest rates.
Return on Equity
ROE is increasing because operating ROA as well as leverage are increasing. Home Depot’s sales and net income are increasing. They are also increasing debt financing and reducing equity through share repurchases.
Operating Profit Margin
Operating profit margin is increasing and is a contributing factor in increasing operating ROA and NOPAT due to increasing margins. Margins are increasing because COGS/Sales and SG&A/Sales are decreasing.
Line Items:
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Cost of Sales/Sales
The ratio is decreasing since cost of sales is increasing slower than sales. This will contribute to increasing margins and is in line with the Home Depot’s cost cutting strategy.
Selling, General & Administrative Costs/Sales
The ratio is decreasing and keeps up with the company’s strategy of improving economies of scale.
Turnover Ratios:Operating Asset Turnover
Operating asset turnover is improving year-by-year due to increasing sales and reducing net assets, meaning asset use is becoming more efficient.
Receivables Turnover
Receivables turnover is relatively steady and it takes the company about 6-7 days to collect cash. This also shows that sales are improving from improving economic conditions and not channel stuffing.
Inventory Turnover
Inventory turnover is improving since inventory is being sold faster. The company took 74 days to sell inventory during 2014 than 78 days in 2013. Inventory turnover is getting better due to Home Depot’s increasing implementation of technology such as cellphones for employees to help them immediately answer customer queries such as inventory availability, price, etc. Also, the improvement of website to allow customer to buy more products online is also leading increasing and faster sales.
Payables Turnover
Payables turnover is also relatively steady in the past 5 years where the company takes about 38-40 days to payoff payables.
Fixed Asset Turnover
Fixed asset turnover has been improving because sales are increasing, and net property and equipment is decreasing in the last five years.
Cash Cycle
Cash cycle is getting better mostly due to improving inventory turnover.
Liquidity Ratios:Current Ratio
There are fluctuations in the past five years but company has become less liquid from last year.
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Quick Ratio
The quick ratio has been decreasing since 2012 due to increase in liabilities but the changes are not significant. The main driver of decrease during 2014 is short-term debt of $290 million.
CFO/CL Ratio
The ratio is improving since 2012 due to increase in cash flow from operations but is not enough to cover current liabilities.
Solvency Ratios:D/E Ratio
Increasing since company is incurring more debt by issuing senior notes and reducing equity through buybacks.
Liabilities/Assets
The ratio is increasing because company’s overall liabilities are increasing for the past five years whereas total assets are relatively steady with small fluctuations. Total assets cannot cover total liabilities. The main driver for increasing liabilities is long-term debt.
Interest coverage is improving from higher earnings. Interest expense decreased by $206 million from last year and has been fluctuating in the past five years.
Interest Coverage using cash flows
Improving due to higher cash flows from operations.
Capex Coverage (assume Capex =negative of Cash from Investing)
Assuming capital expenditures are negative of cash from investing, cash flow from operations covers CAPEX. Coverage is increasing from last three years due to higher CFO and increases significantly from last year due to drop in investment expenditures.
Payout Ratio
Company is paying between 38% - 42% of net earnings as dividends since 2011. Therefore, retaining about 60% of profits for use in the firm.
Prediction of BankruptcyAltman’s Z-Score
01-Feb-15 02-Feb-14 03-Feb-13 29-Jan-12 30-Jan-11
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Altman's Z-score 7.57 6.53 6.39 5.46 4.88
Home Depot’s Altman’s Z-score has been above 3 for the last 5 years which means that the company falls into the safe category according to Altman’s Z-score model. This means that the company is very unlikely to go bankrupt. Also, notice that this score is actually increasing as the years pass. Since Altman’s Z-score model says that any company with a Z-score above 3 is considered safe, an increasing Z-score is a good sign as it indicates that the company is getting safer and safer. As a result, investors who hold Home Depot’s bonds should feel confident that they will receive all the payments associated with their Home Depot bonds. For detailed calculation of Z-score, refer to appendix.
Cross-Sectional Analysis Key Stats Comparison
Company Name Share Price Shares Outstanding
Market Capitalization
Total Enterprise Value
The Home Depot Inc. 134.74 1,267.9 170,834.3 188,656.3Lowe’s Company Inc. 77.34 917.0 70,920.8 82,134.8Industry Average 36.78 402.3 11,577.8 12,782.6
LTM Tangible Book Value/share
Price/Book Value
Beta LTM Diluted EPS Excl. Extra Items
The Home Depot Inc. 3.90 34.55x 0.97 5.33Lowe’s Company Inc. 9.14 8.46x 0.95 3.15Industry Average 11.24 3.27x 1.54
Ratios Comparison
Company Name ROA % (Net) ROE % (Net) EBITDA Margin %
Gross Margin %
The Home Depot Inc. 16.5% 78.0% 15.2% 34.9%Lowe’s Company Inc. 10.0% 31.2% 11.9% 34.8%
Inventory Turnover
Net PPE Turnover
Total Asset
Turnover
AccountsReceivableTurnover
The Home Depot Inc. .4.6x 3.8x 2.0x 48.8xLowe’s Company Inc. 3.8x 2.9x 1.7x NA
Quick Ratio Current Ratio Cash Ratio
The Home Depot Inc. 0.3x 1.2x 0.6xLowe’s Company Inc. 0.1x 1.0x 0.4x
Total Debt to Equity
Interest Coverage
The Home Depot Inc. 273.8% 12.7x
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Lowe’s Company Inc. 150.4% 9.8xNote: the ratios of the two firms are based on LTM 12 months Nov-01-2015 stats cited from the Capital IQ for consistency and comparability.
The two industry giants, Home Depot and Lowe's, are expected to generate about 83.3% of total industry revenue in 2015, making the Home Improvement industry highly concentrated. When their key stats are compared to the industry average, we see that both Home Depot and Lowe’s have significantly larger enterprise value figures. In other words, they have larger firm sizes and will be able to take advantage of economies of scale. Between the two major competitors, Home Depot tends to outperform in every aspect. It has higher profitability ratios, liquidity ratios, and turnover ratios. However, they have a very similar gross margin ratio which means that the profitability of their products are quite comparable. It also implies that Home Depot must have other advantages. Also, Home Depot has a significantly higher ROE ratio of 78% compared to Lowe’s 11.9% and the ROA ratio of Home Depot is higher than Lowe’s by 6.5%. In addition, Home Depot has a considerably higher P/B ratio of 34.55x compared to Lowe’s 8.46x and the EPS of Home Depot is $5.33 compared to that of Lowe’s of $3.15. (The Home Depot has a P/B ratio that is 4x Lowe’s and an EPS that is 1.7x Lowe’s.)
Although Home Depot and Lowe’s have similar betas of 0.97 and 0.95, they have significantly different capital structures. Home Depot has a substantial amount of debt and its D/E ratio is 273.8% whereas Lowe’s D/E ratio is 150.4%. Theoretically, a higher portion of debt increases a firm’s idiosyncratic risk since debt is an obligation that firms must repay and the firms will go bankrupt if they miss any of the payments. However, Home Depot also has higher interest coverage ratios which implies that it has sufficient funds to pay for its debt related payments. Finally, since the home improvement industry is a relatively mature industry and Home Depot is a “mature” firm, the cash flows and the profitability of the firm are relatively stable and Home Depot has accumulated a lot of cash on hand. For these reasons, investors are relatively confident in Home Depot’s ability to make future interest and debt payments.
From the past data, it can be seen that there has been some variability in the revenue growth rate. There was a jump in the growth rate between 2010 and 2011 but then the rate started declining slightly after 2011. It is likely that Home Depot couldn’t maintain the strong sales growth rate seen in 2011 since the home improvement industry is quite mature and very competitive. As a result, a realistic assumption for Home Depot’s sales growth rate going forward would be a rate that is relatively low and decreasing over time. But, we can assume
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that the sales growth rate will continue to be a positive figure as we see the company opening new stores (6 new stores in 2015 alone) which helps increase sales as more consumers will be able to easily access Home Depot stores. In addition, it is safe to assume that sales will have positive growth as the U.S economy and home improvement market continues to strengthen, increasing the amount of disposable income available for consumers to spend on home improvement. Home Depot continues to add value to consumer through its online distribution offering. The increase in efficiency of customer delivery has made improved consumer retention and attraction which is important for topline growth in a competitive industry. Therefore, we assume that the sales growth rate for 2015 is 5% and then declines by 0.5% each year.
Operating Expense Assumption
The operating expense ratio for The Home Depot has been steadily declining over the last few years even though the sales growth rate has increased. We see that it dropped from 91.5% back in 2010 to approximately 87.5% in 2014. This indicates that The Home Depot has been effective in controlling their costs and that they haven’t been increasing sales through aggressively lowering prices. This is not surprising as cost efficiency is one of the company’s key strategies. The main expenses within this operating expense figure include cost of goods sold (COGS), sales, general, and administrative expenses (SG&A), as well as research and development (R&D) expenses.
From our ratio analysis, we can see that The Home Depot’s COGS ratio has been steady around 65.5% over the past 5 years. In 2010, it was equal to 65.73% and by 2014, it was still 65.19%. The stability of the COGS ratio makes us believe that it will remain relatively constant for the foreseeable future. The Home Depot’s position as a retail giant has likely played a large role in helping the company keep this ratio steady and maintain their healthy gross margin of approximately 34.5%. Because the company is such a large retailer, its suppliers have very little bargaining power and therefore cannot raise their prices. As a result, The Home Depot is able to continue purchasing goods from their suppliers at a similar price from year to year.
For the SG&A/Sales ratio, it has been declining over the last few years and this decline is likely the reason for the overall decline in The Home Depot’s operating expense ratio over the past few years. However, this ratio will likely increase in the future because while the sales expense component of the SG&A ratio is likely to be stable or declining slightly due to the company’s cost cutting strategy, the general and administrative expenses component will increase significantly as The Home Depot is currently facing lawsuits and will need to pay ongoing litigation fees.
As for R&D expenses, this component is not a significant part of operating expenses as The Home Depot is mainly a retailer and doesn’t really do much R&D in regards to product
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innovation. However, the company does invest in R&D with regards to its technology and systems. But, since the company isn’t planning on starting any large scale technological projects within the next few years, the R&D expense will likely stay around the same level.
Therefore, since both the COGS ratio and R&D ratio are assumed to remain stable while SG&A ratio increases due to litigation fees, we will assume that the overall operating expense ratio will increase by 0.6% to 88% for the next few years. This is because the rise in SG&A expense will overpower the constant COGS ratio and R&D ratio. However, after the litigation concludes, we can assume that the operational expense ratio will start decreasing again as Home Depot is generally very cost efficient and has been expanding its online presence. With a higher investment in online distribution capabilities such as the Buy Online Pickup In-Store, future staffing needs will be reduced and inventory management will improve. Consequently, the SG&A ratios will decline. As the legal case will likely wrap up by the end of 2017, we will therefore assume that Home Depot’s operating expense ratio will decline to 87.5% in 2018 and continue to fall by 0.5% each year.
Net Interest Expense Assumption
Home Depot’s borrowing costs were volatile between 2011 and 2014. The biggest decline in borrowing costs was between 2013 and 2014 where rates fell from 6.47% to 3.35%. Home Depot is taking advantage of the low-interest environment by refinancing current debt and borrowing at longer maturities so the company is protected from future interest rate increases. Since it is best to use the most recent interest rates for forecasting assumptions as they represent the current interest rate environment, we will use an interest rate expense of 3.35% for our forecast.
Tax Rate Assumption
The tax rate slightly varied between 2010 and 2012, however, after 2012 the tax rate stayed constant at 36.4%. There is no evidence to suggest that the current tax rate will vary significantly in the future hence we will apply a tax rate of 36.4% in our forecasts.
*Note: We have referred to fiscal year ending on Jan. 30, 2011 as “2010”, fiscal year ending on Jan 29, 2011 as “2010” and so on to make the forecasts easier to understand.
Forecasted Income Statements
CONDENSED INCOME STATEMENT
Actual Condensed Income Statements Forecasting Period
Net Income 3,338 3,883 4,535 5,385 6,345 6299 6503 6703 7193 7810
Balance Sheet AssumptionsNet Operating Working Capital (Net OWC) Assumption
Home Depot’s net owc ratio has been declining since 2012. Since this ratio indicates how much operating working capital is needed to support sales, a decline in this ratio is a good thing as it means that Home Depot is being more efficient with its working capital. The decline may also be partially attributed to the decrease in the sales growth rate. As the sales growth rate declines, the net owc ratio often falls slightly as well because a lower level of owc is needed to support sales. We see that the decline in Home Depot’s past net owc ratios has ranged from 0.5% to 1%. Since Home Depot’s focuses heavily on operational efficiency and its sales growth rate is forecasted to continue declining, it is safe to assume that net owc/sales will also continue to fall as well. However, since it is difficult to keep improving operating working capital efficiency, we will assume that this ratio only declines by 0.15% a year which is more conservative than the rate at which this ratio had been declining at in the past.
Net Long Term Assets (Net LTA) Assumption
The net long term assets ratio for Home Depot has been steadily decreasing at a significant rate for the last few years. Since this ratio is also an inverse asset turnover ratio, a decreasing net long term assets ratio is a positive sign as it indicates that the company needs less fixed assets to support a given level of sales. However, since Home Depot has opened new stores in 2015, its net long term assets ratio for 2016 will increase (since we are using lagged long term assets). This is especially likely since sales growth rate is forecasted to decline. But, after this increase in fixed assets, Home Depot will likely be able to support their sales with the new level of fixed
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assets. Therefore, we will assume that the net long term assets ratio increases to 26% for 2016 and then stays constant for the rest of our forecast period.
Liabilities Assumption – Payout Approach
We will use the payout approach to forecast Home Depot’s level of equity. We will then determine net debt by subtracting shareholder’s equity from net capital. Home Depot has a history of regular dividend payments; they have paid a dividend for 112 consecutive quarters with the aim of increasing shareholders value. The board recently announced they were going to target a dividend payout ratio of approximately 50%. For this reason, we will assume a dividend payout ratio of 50%. The board has also indicated that they have agreed to a share repurchase plan where they will repurchase $18 billion of shares by the end of 2017. For our forecast, we will spread this $18 billion worth of share repurchases evenly over the three years and assume that Home Depot will repurchase $6.0 billion of shares each year from 2015 to 2017. We will also modify the regular shareholder equity formula to reflect this plan. We will therefore calculate the future book value of equity for 2015 to 2017 with the following formula: SEt = SEt-1 + retention ratio*forecast net incomet - $6.0 billion. After 2017, we can revert back to using the formula SEt = SEt-1 + retention ratio*forecast net income to calculate book value of equity.
VALUATIONCost of Equity AssumptionsWe are going to assume that the risk-free rate is equal to 2.30% since the 10 year U.S. Treasury bond currently yields approximately 2.30%. Also, we will use 0.97 for Home Depot’s beta as Yahoo Finance provided us with this figure. For the market risk premium, we will use 5% to be conservative since the market risk premium is usually around 4% to 6%. With these assumptions, we can now calculate Home Depot’s cost of equity by using the CAPM formula: Re
= Rf + beta*(Market Risk Premium). Home Depot’s cost of equity will therefore be equal to 7.15% in our forecast. Furthermore, we will assume the growth of abnormal earnings to be equal to 2% since the long term GDP growth rate for the US is around 2.4% and the growth of a US company’s abnormal earnings should be lower than the country’s long term GDP growth rate.
Cost of Equity AssumptionsRF 2.30%Beta 0.97Market Premium 5%Re 7.15%g 2%
Plain Vanilla Abnormal Earnings Valuation ResultsAccording to our plain vanilla abnormal earnings valuation, Home Depot’s shares are worth $107.58 each. Since Home Depot’s shares are currently trading at approximately $134, our
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valuation suggests that Home Depot’s shares are overvalued. Again, for a more detailed AEV that shows the implicit assumptions for year 5 to year 10, please refer to the appendix.
Abnormal Earnings Valuation
YEARS 0 1 2 3 4 5
B.V.E 9,322 6,471 3,723 1,075 4,671 8,576
NI 6,345 6,299 6,503 6,703 7,193 7,810
ROE 68% 100% 180% 669% 167%
NORMAL EARNINGS 667 463 266 77 334
AE 5,632 6,041 6,436 7,117 7,476
TV OF AE 148073
AE+TV 5,632 6,041 6,436 7,117 155,549
VALUE 140,601
SHARES OUTSTANDING 1307
VALUE PER SHARE $107.58
Sensitivity AnalysisA sensitivity analysis was also conducted in order to see how Home Depot’s value would change if they performed better or worse than our initial assumptions. Please refer to the appendix for the detailed sensitivity analysis forecasts and valuation.
Optimistic Scenario
In this scenario, we assume that Home Depot will perform better than our assumptions in the base case. Specifically, we will see what happens to Home Depot’s stock value if it achieves higher revenue growth rates and is more efficient at using its working capital and assets to drive sales. Instead of a decline of 0.5% in revenue growth rate a year, we will assume that Home Depot is actually able to grow its revenue and that the growth rate increases by 0.25% a year. We will then assume that Home Depot is more efficient with its net owc and is able to support the revenue growth while reducing its net owc by 0.20% a year. We will also assume that Home Depot’s long term assets ratio stays steady at the 2015 levels instead of increasing to 26%.
The results from this optimistic scenario was that Home Depot’s value per share rose to $114.42. The increase in share value is not unexpected as this scenario assumes that Home Depot is doing better than we assumed under the initial AEV case.
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Pessimistic Scenario:
In this scenario, we see what happens to the value of Home Depot if sales growth rate further declines and if they need to grow assets more aggressively to support sales. For instance, this would be the case if Home Depot needed to open a lot more stores in order to keep their sales growth rate from declining even further. We will also see what happens if interest rates increase and Home Depot is forced to pay higher interest rate expenses. Therefore, we will assume that revenue growth rate for 2015 is 5% and then declines by 0.75% each year. For the LTA/sales ratio, we will assume that it grows by 0.50% a year. Finally, we will use 4% for interest expense assumption instead of 3.35%.
The results from this pessimistic scenario was that the value per share fell to $103.73. Again, a fall in share value compared to the initial case is expected as Home Depot has lower revenue growth, higher interest expenses, and less efficiency with their fixed assets in this scenario.
Abnormal Earnings Valuation with ROE Mean ReversionWe also completed an abnormal earnings valuation for Home Depot with the ROE returning back to the industry average. By doing so, we saw how much Home Depot would be worth if its ROE converged to industry ROE levels by year 15. We obtained the average industry ROE for the home improvement industry from CSI Market and the figure was 23.96%. The result from this valuation was that Home Depot’s share price was equal to $376.99. This figure is very inflated because Home Depot had a very high ROE at the end of our initial forecast period due to their share repurchase plan. So, when we lowered ROE levels slowly so that it would converge to 23.96% by year 15, the result was that Home Depot was assumed to still have very high ROE levels up until year 12. Therefore, Home Depot’s share price is inflated with this AEV. However, we will still include this valuation for completeness and include the calculations in the appendix.
RECOMMENDATIONWhile Home Depot is currently trading at approximately $134 per share, our valuation suggests that Home Depot is overvalued and should be trading at approximately $108. We believe Home Depot’s current share price might reflect the mispriced U.S. equity market and that the company’s buyback program has inflated the company’s stock. Therefore, we would recommend investors to sell this stock.
Although the U.S. economy has witnessed a tremendous amount of growth since the recession in 2009, the current values of the S&P 500 might reflect economic factors beyond the strength/growth of the U.S. economy. Market turmoil in Europe and fear of tapering in the emerging markets has meant that international investors are moving their capital towards the safest and best performing market in the world - the U.S. These investors are not attracted to
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the bond markets due to the historically low-interest rate environment. This has led to a massive inflow of capital into the U.S. equity market. The capital inflow from abroad combined with a domestic asset class rotation from bonds to equities has resulted in an overvalued equity market. As the global economy recovers, capital flow out of the U.S. economy could adversely affect Home Depot stock price.
In addition, Home Depot is engaged in a share repurchase program that has increased the stock price because of an artificial rise in the demand for the stock. Buybacks have a positive impact on shares by signaling the company is undervalued. However, we do not believe Home Depot is undervalued; we believe they are engaging in buybacks due to the lack of expansion projects in the market since home improvement is a saturated market. As a result, it might be difficult for Home Depot to expand in this space unless it is through acquisitions. In the absence of expansion opportunities, Home Depot might feel that the most tax efficient way to deliver value to shareholders will be through repurchases.
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APPENDIXAppendix 1 –Consolidated and Condensed Balance Sheets
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except share and per share data)
ASSETS 01-Feb-15
02-Feb-14
03-Feb-13
29-Jan-12
30-Jan-11
Category
Current Assets:
Cash and Cash Equivalents $1,723 $1,929 $2,494 $1,987 $545 OWC
Receivables, net 1,484 1,398 1,395 1,245 1,085 OWC
Other Long-Term Liabilities 1,844 2,042 2,051 2,146 2,135 LT Liabilities
Deferred Income Taxes 642 514 319 340 272 LT Liabilities
Total Liabilities 30,624 27,996 23,307 22,620 21,236
STOCKHOLDERS’ EQUITY
Common Stock, par value $0.05; authorized: 10 billion shares; issued: 1.768 billion shares at February 1,2015 and 1.761 billion shares at February 2, 2014;
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outstanding: 1.307 billion shares at February 1, 2015and 1.380 billion shares at February 2, 2014 88 88 88 87 86
Accumulated Other Comprehensive (Loss) Income -452 46 397 293 445
Treasury Stock, at cost, 461 million shares at February 1, 2015 and 381 million shares at Feb. 2, 2014
-26,194 -19,194 -10,694 -6,694 -3,193
Total Stockholders’ Equity 9,322 12,522 17,777 17,898 18,889 Equity
Total Liabilities and Stockholders’ Equity $39,946 $40,518 $41,084 $40,518 $40,125
CONDENSED BALANCE SHEET
All 'Cash and Cash Equivalents' is assumed to be from Operations since Home Depot is repurchasing stock for the past five years, hence, Cash Flow from Financing Activities is negative.
Net OWC 4,361 4,563 5,231 5,174 4,399
Net LT Assets 22,158 22,683 23,342 23,512 24,239
Net Assets 26,519 27,246 28,573 28,686 28,638
Net Debt 17,197 14,724 10,796 10,788 9,749
Sh Equity 9,322 12,522 17,777 17,898 18,889
Net Capital 26,519 27,246 28,573 28,686 28,638
Appendix 2 –Consolidated Income StatementsTHE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(amounts in millions, except per share data) Fiscal Year Ended
01-Feb-15 02-Feb-14 03-Feb-13 29-Jan-12 30-Jan-11
NET SALES 83,176 78,812 74,754 70,395 67,997
Cost of Sales 54,222 51,422 48,912 46,133 44,693
GROSS PROFIT 28,954 27,390 25,842 24,262 23,304
Operating Expenses:
Selling, General and Administrative 16,834 16,597 16,508 16,028 15,849
Depreciation and Amortization 1,651 1,627 1,568 1,573 1,616
Total Operating Expenses 18,485 18,224 18,076 17,601 17,465
OPERATING INCOME 10,469 9,166 7,766 6,661 5,839
Interest and Other (Income) Expense:
Interest and Investment Income -337 -12 -20 -13 -15
Interest Expense 830 711 632 606 530
Other - - -67 - 51
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Interest and Other, net 493 699 545 593 566
EARNINGS BEFORE PROVISION FOR INCOME TAXES 9,976 8,467 7,221 6,068 5,273
Provision for Income Taxes 3,631 3,082 2,686 2,185 1,935
NET EARNINGS 6,345 5,385 4,535 3,883 3,338
Weighted Average Common Shares 1,338 1,425 1,499 1,562 1,648
BASIC EARNINGS PER SHARE 4.74 3.78 3.03 2.49 2.03
Diluted Weighted Average Common Shares 1,346 1,434 1,511 1,570 1,658
DILUTED EARNINGS PER SHARE 4.71 3.76 3.00 2.47 2.01
Tax Rate 36.4% 36.4% 37.2% 36.0% 36.7%
Net Interest Expense after Tax 314 445 342 379 358
NOPAT 6,659 5,830 4,877 4,262 3,696
Appendix 3 – Consolidated Cash Flow Statements
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions, except per share data) Fiscal Year Ended
01-Feb-15
02-Feb-14
03-Feb-13
29-Jan-12 30-Jan-11
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $6,345 $5,385 $4,535 $3,883 $3,338
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities:
Depreciation and Amortization 1,786 1,757 1,684 1,682 1,718
