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Barbara Croteau

Date: December 8, 2010

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Lowe’s Project

Table of ContentsIntroduction................................................................................................................................................3

Vertical Analysis of the Balance Sheet.......................................................................................................3

Percentage Rate of Change.........................................................................................................................8

Cost of Sales..............................................................................................................................................12

Horizontal Analysis of the Statement of Earnings....................................................................................15

Horizontal Analysis of the Statement of Cash Flows................................................................................18

Ratio Calculation.......................................................................................................................................21

Profitability Ratios.................................................................................................................................21

Liquidity Ratios......................................................................................................................................26

Solvency Ratios......................................................................................................................................31

Market Tests..........................................................................................................................................34

Market Price..............................................................................................................................................36

Lowe’s Strengths and Weaknesses...........................................................................................................39

Strengths...............................................................................................................................................39

Weakness..............................................................................................................................................40

Two recommendations..........................................................................................................................41

Conclusion.................................................................................................................................................41

Appendix A (Graphs).................................................................................................................................42

Appendix B................................................................................................................................................58

Ratio calculations...................................................................................................................................58

Appendix C: (Charts).................................................................................................................................60

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Introduction

This report focuses on vertical, horizontal and ratio analysis of Lowe’s Companies, Inc. financial

statements for the five year period 2005 through 2009. The year 2009 came to an end on January 29, 2010

where a continuous downward trend beginning in 2006 when the real estate bubble just began to burst and

the domino effect hit home improvement market. Using analysis Lowe’s financial performance will be

compared to Home Depot, and assess their strengths and weaknesses in the market. Despite

managements efforts to continue growth by improving profitability, general and specific economic

problems continue to cause problems in the company’s market segment. The analysis will identify

Lowe’s position to survive this current financial crisis.

Vertical analysis of the financial statements computes the relationship between each item on a

financial statement to a base figure representing 100%. Setting up vertical analysis over a five-year period

will determine the relative composition of assets, liabilities, stockholders’ equity, revenues and expenses.

Horizontal analysis computes the percentage change for individual items in the financial statements from

year to year. Trends in items on the financial statement can be determined as having increased, decreased

or stayed constant. The current and quick ratios are two tests of liquidity that are computed and analyzed

in order to assess Lowe’s ability to fulfill current obligations. The report begins with vertical analysis of

the balance sheet.

Vertical Analysis of the Balance Sheet

During the five year period 2005 through 2009, the two largest assets have been merchandise

inventory and property, net of accumulated depreciation. The third largest asset started out as short-term

investments in 2005 and 2006, then in 2007, long-term investments were the third largest asset. Other

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noncurrent assets at 1.4% beat out short-term investments at 1.3% as the third largest asset. In 2009, cash

and cash equivalents was the third largest asset at 1.9%. The third largest asset never exceeded two

percent of Lowe’s total assets. In the five-year period, Lowe’s three largest assets exceeded 95% of the

company’s total assets. See Table 1.1 below:

Lowe’s Three Largest Assets

Table 1.1 2009 2008 2007 2006 2005

Cash and cash equivalents 1.90%

Short-term investments 1.60% 1.80%

Merchandise inventories 25.00% 25.20% 24.70% 25.70% 26.90%

Long-term investments 1.60%

Property, net 68.20% 69.60% 69.20% 68.30% 66.40%

Other noncurrent assets 1.40%

Total 95.10% 96.20% 95.50% 95.60% 95.10%

Table 1.1: See Vertical Balance Sheet in appendix C, and a Bar Graph in appendix A

Lowe’s largest asset is property which consists of all the land, stores, warehouses, and corporate

offices they own. The stores and warehouses are critical assets to generating revenue as they house the

inventories and provide retail space where customers can shop for products they want. The percentage of

property to total assets increased between 2005 through 2008 before decreasing 1.4% in 2009 due to a

higher write down of properties due to impairment. Lowe’s opened fewer stores in 2009 expending $1.8

billion in cash for the year; the increase in property was primarily offset by the $1,733 million of

depreciation expense for the year. Therefore, the drop in property was due to $205 million in impairment

write off for 2009 as found on page 25 of the 2009 annual report.

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Cash and Cash Equivalents as a Percentage of Total Assets

Table 1.2 2009 2008 2007 2006 2005

Lowe’s 1.9% 0.8% 0.9% 1.3% 1.7%

Home Depot 3.5% 1.3% 1.0% 1.1% 1.8%

Table 1.2below: See Vertical Balance Sheet in appendix C.

Cash and cash equivalents have increased in 2009 for Lowe’s at 1.9% and Home Depot to 1.5%.

They both had stable cash and cash equivalents in 2005 and then experienced a fast and steady decline

hitting a low in 2008 of 0.08% at Lowe’s and 1.3% for Home Depot. Both companies paid down short-

term debt and long-term debt. Lowe’s opened fewer stores and closed low performing stores.

Cash Ratio:

Table 1.3 2009 2008 2007 2006 2005

Lowe's 0.07 0.03 0.04 0.06 0.07

Home Depot 0.14 0.05 0.04 0.05 0.06

Table 1.3 above: See Vertical Balance Sheet in appendix C.

The cash ratio shows that Lowe’s has .07 cents of cash for every dollar of current liabilities in

2009. Home Depot has double the cash using this ratio in 2009, but back in 2005 and 2006 Lowe’s was

slightly higher when they were both .04 in 2007 and in 2008 Lowe’s drops to .03 and Home Depot moves

up to .05; finally, in 2009 Lowe’s increases to .07 and Home Depot jumps to .14. These ratios combined

with cash and cash equivalents as a percentage of total assets show that both companies sufficiency of

cash at the end of 2005, 2006, and 2009 is sufficient, while slipping a little too low in 2007 and 2008.

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Both companies tightened up operations by closing low producing stores and increasing cash on hand

after the sharp decline in real estate and home improvements slowed business in 2007 and 2008.

Lowe’s Three Largest Liabilities

Table 1.4 2009 2008 2007 2006 2005

Accounts Payable 13.0% 12.6% 12.0% 12.7% 11.5%

Other current liabilities 3.6% 4.1% 5.1%

Long-term debt 13.7% 15.4% 18.1% 15.6% 14.2%

Other long-term liabilities 4.4% 4.2%

Total 31.1% 32.2% 33.7% 32.4% 30.8%

Table 1.4 above: See Vertical Balance Sheet in appendix C, and a Bar graph in appendix A.

Accounts payable increases consistently from 11.5% in 2005 to 13% in 2009, and is consistently

the second largest liability on the books. According to Lowe’s annual report page 36, the Company has an

agreement with a third party which works out payment options with participating suppliers at a

discounted price for early payment. The Company’s goal in entering into this arrangement is to capture

overall supply chain savings. Long-term debt is any debt that will be repaid in a period longer than one

year. According to Note 6 in the annual report long-term debt consists of Mortgage notes, notes senior

notes, and capital leases and other. Long-term debt is the largest liability starting at 14.2% in 2005 and

then increasing steadily to 18.1% in 2007, while dropping back to 2006 levels in 2008 to 15.4% and

dropping again in 2009 to 13.7%. The third largest liability in 2009 of 4.4% and 2008 4.2% is other long-

term liabilities, and in 2005 it is other current liabilities at 5.1%, 4.1% in 2006, and drops to 3.6% in

2007.

Table 1.5 2009 2008 2007 2006 2005

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Total current liabilities 22.3% 23.2% 25.1% 23.5% 23.7%

Total liabilities 42.2% 44.7% 47.9% 43.4% 42.0%

Stockholders' equity 57.8% 55.3% 52.1% 56.6% 58.0%

Table 1.5 below: See Vertical Balance Sheet in appendix C.

The relative proportion of current liabilities to total liabilities is slowly decreasing. In 2005 total

current liabilities are 56% of total liabilities, slipping to 54% in 2006, 52% in 2007 -2008 and 53% in

2009. According to the report on page 18, there is a trend of paying down current liabilities and while

total liabilities increased from 2005 – 2007 only to slip in 2008 and again in 2009; they are clearly paying

off debt and not expanding because inventory is moving slower, so Lowe’s doesn’t need to replace it.

The proportion of total liabilities compared to stockholders’ equity is the percentage of total

liabilities / stockholders’ equity, also known as the debt to equity ratio, and it expresses a company’s debt

as a proportion of its stockholders’ equity. In 2009 total liabilities is 73% of stockholders equity which is

about the same as it was in2005, it means that for each $1 of stockholders’ equity. Lowe’s had .73cents

worth of liabilities, and it slowly increased to .92 in 2007 only to decline to .81 in 2008. Because they are

opening fewer stores and closing non performing stores (annual report page 18&19) total liabilities have

decreased in 2009. Total stockholder equity went from .58 in 2005 and then steadily declined in 2006

to .57 and .52in 2007. It seems to bottom out and then climb back up in 2008 to .55and then again in 2009

to .58. Debt is risky to a company because of interest which must be paid regardless of sufficient income.

Therefore, Lowe’s is putting itself in position to weather the current slowdown by keeping this ratio low

making them a safe company for creditors to loan money to.

The two major components to stockholders’ equity are retained earnings and contributed capital.

Retained earnings increased from 49.5% in 2005 to 53.5% in 2006. It then decreased to 49.7% in 2007,

only to move back up to 52.3% in 2008 and then increased again in2009 to 55.5%. Retained earnings

equals beginning retained earnings plus net income minus dividends. So net income is increasing or

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dividends are no longer being declared. According to Lowe’s annual report on page 41 note 7, the

Company has a share repurchase program that is implemented through purchases from the open market or

through private transactions. These shares are retired and return to authorized and unissued status. Of the

shares repurchased 1.9 billion was recorded as a reduction in retained earnings. Contributed capital results

from owners providing cash (and sometimes other assets) to businesses. Owners invest in the business

and receive shares of stock as evidence of ownership. Sale or purchase of stocks affect contributed

capital.

***

Using the horizontal analysis of the balance sheet, we have answered the following questions on

percentage rate of change between Lowe’s and Home Depot. Comparing cash and cash equivalents from

2005 through 2009, we will explain the trend in this asset over those years. Having calculated the current

and quick ratios for the same years and tabling the data, Lowe’s liquidity will be evaluated. Tables are set

up to show the percent rate of change in assets, merchandise inventory and property, less accumulated

depreciation from 2005 through 2009. What is the trend change in these two assets and what has caused

this trend? We will also table accounts payable, long-term debt and retained earnings and answer the

question what is the trend change in these sources of financing and what has caused these trends?

Percentage Rate of Change

Table 2.3 shows the trend in both companies has been to hold on to cash. Lowe’s went from four

years of mostly borrowing and investing to a 170% jump in cash and cash equivalents, and Home Depot

in 2005 started with a 56.7% cash and cash equivalents to two consecutive years of borrowing. And then

again in 2008 they held on to cash and a huge increase in cash and cash equivalents in 2009. Cash being

king, in an unstable economy companies start holding on to cash and slow up borrowing.

Percentage rate of change for Cash and Cash equivalents

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Table 2.3 2009 2008 2007 2006 2005

Lowe's 158% -12.8% -2.28% -13.9% -20.2%

Home Depot 173.8% 16.6% -25.8% -24.3% 56.7%

Table 2.3: See Horizontal Balance Sheet in appendix C, and graph in appendix A.

Table 2.1 Current ratio shows that Lowe’s had $1.32 in current assets for each $1.00 in current

liabilities, and Home Depot had $1.34 in current assets for each $1.00 in current liabilities. The current

ratio measures the cushion of working capital that companies maintain to allow for the inevitable

unevenness in the flow of funds through the working capital accounts. The ratio would be seen as strong

because of Lowe’s and Home Depot’s ability to generate cash.

Current Ratio

Table 2.1 2009 2008 2007 2006 2005

Lowe's 1.32 1.22 1.12 1.27 1.34

Home Depot 1.34 1.20 1.15 1.39 1.20


Current Ratio = Current Assets/Current Liabilities

Table 2.2 Quick ratio shows that in 2010 Lowe’s had .14 cents in cash and near cash assets for

every $1.00 in current liabilities, and Home Depot had .23 cents for every $1.00 in current liabilities. The

quick ratio is a measure of the safety margin that is available to meet a company’s current liabilities.

Home Depot is in a better position than Lowe’s using this ratio.

Quick Ratio

Table 2.2 2009 2008 2007 2006 2005

Lowe's 0.14 0.09 0.07 0.12 0.15

Home Depot 0.23 0.13 0.14 0.3 0.25

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Quick Ratio = Quick Assets/Current Liabilities (quick assets include cash, short-term investments,

and accounts receivable {net the allowance for doubtful accounts})

Tables 2.4 and 2.5 shows Merchandise inventory and Property less accumulated depreciation are

both shrinking. Both companies are selling off inventory that they are not replacing at the same rate, and

Property is no longer increasing but rather remaining stable because they slowed store openings and

closed stores decreasing Property Plant and Equipment. They appear to be decreasing overhead and

keeping their costs under control wherever they can. The housing bubble was creating an increase in

merchandise inventory to keep up with the demand of money flowing into the housing market. When the

bubble burst in 2008, and the banks pulled back lending because there wasn’t any cash available,

businesses had a sharp decline in sales rather abruptly. Between the housing bubble and the financial

crisis, Lowe’s slowly began closing down stores that are not bringing in a profit.

Percentage rate change for Merchandise Inventory

Table 2.4 2009 2008 2007 2006 2005

Lowe's 0.005 0.079 0.065 0.077 0.122

Home Depot -0.045 -0.09 -0.085 0.125 0.132

Table 2.4 and 2.5: See Horizontal Balance Sheet in appendix C, and graph in appendix A.

Percentage rate change for Property, less accumulated depreciation

Table 2.5 2009 2008 2007 2006 2005

Lowe's -0.01 0.064 0.126 0.16 0.176

Home Depot 0.018 -0.012 0.005 0.054 0.143

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Tables 2.6 through 2.8 shows accounts payable, long-term debt and retained earnings are all

decreasing. It makes sense that if merchandise inventory is shrinking then accounts payable would be

also. If the company isn’t buying inventory, then it wouldn’t be paying for it either. Long-term debt is

decreasing along with property because property is long-term debt. Retained earnings is shrinking

because overall sales are down, and they are compensating by shutting down low performing stores that

are not carrying a substantial profit to offset the losses.

Percentage rate of change for Accounts Payable

Table 2.6 2009 2008 2007 2006 2005

Lowe's 0.043 0.107 0.054 0.244 0.051

Home Depot 0.009 -0.159 -0.221 0.219 0.046

Percentage rate of change for long-term debt

Table 2.7 2009 2008 2007 2006 2005

Lowe's -0.101 -0.096 0.289 0.236 0.143

Home Depot -0.104 -0.151 -0.022 3.357 0.244

Percentage rate of change for retained earnings

Table 2.8 2009 2008 2007 2006 2005

Lowe's 0.074 0.111 0.033 0.219 0.265

Home Depot 0.094 0.062 -0.655 0.142 0.208

Table 2.6 through 2.8: See Horizontal Balance Sheet in appendix C, and graph in appendix A

The entire trend is toward shrinking and not expanding. Both businesses have been hit by the

current financial crisis that we have all been affected by. According to the report on page 19, even with

economic uncertainty Lowe’s is encouraged by recent results in 2009 and believes that the worst of the

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economic cycle is behind them. If they continue closing slow producing stores during the downtrend and

attempt to minimize their losses, they will weather this recession and eventually stabilize or hopefully

expand again. In the 2009 annual report they talk about their business outlook as of February 22, 2010,

the date of their fourth quarter 2009 earnings release, they expect to open 40-45 stores during 2010,

resulting in square footage growth and expected sales increase of 4 to 6% and expect to make share

repurchasing during 2010 it is not assumed.

***

Cash flow from operating activities continued to provide the primary source of liquidity. The

decrease in net cash flows was primarily driven by lower net earnings, offset by working capital

improvements. The decrease in net cash used in investing was driven by a 45% decline in property

acquired due to reduction in their store expansion program. The increase in cash used in financing was

attributed to a billion net repayment related to short-term borrowings share repurchases.

Cost of Sales

Lowe’s cost of sales begins at 65.8% in 2005, then for the next two years it begins to decline and

then a small increase in 2008 only to drop again in 2009. Because of the rise and fall the gross profit

percent’s also slowly increasing until 2008 and then drops only to increase again in 2009. As expected

gross profit decreases when cost of sales increases because if you’re paying more for your merchandise

and not increasing your prices of course your profit decreases.

Percentage of Cost of Sales and Gross Profit

Table 3.1 2009 2008 2007 2006 2005

Cost of Sales 65.1 65.8 65.4 65.5 65.8

Gross Profit 34.9 34.2 34.6 34.5 34.2

Table 3.1: See Lowe’s Vertical Statement of Earnings in appendix C.

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According to the footnotes on page 37 of the Lowe’s 2009 Annual Report, the items captured for

cost of sales are as follows:

Cost of Sales

Total cost of products sold, including:

-Purchase costs, net of vendor funds

-Freight expenses associated with moving merchandise inventories from vendors to retail stores.

-Costs associated with operation the Company’s distribution network, including payroll and

benefit costs and occupancy costs;

Cost of installation service provided;

Costs associated with delivery of products directly from vendors to customers by third parties;

Costs associated with inventory shrinkage and obsolescence.

The total percentages for the two largest expenses have increased in recent years because they are

expenses, and expenses are subtracted from gross profit, they have a negative effect on net earnings.

Lowe’s is using a strategy of having a sufficient number of well trained workers available to its

customers, rather than cutting costs at the expense of providing good service.

Two Largest Expenses

Table 3.2 2009 2008 2007 2006 2005

Selling, General, Advertising

and

Administrative Expenses 24.8% 23.0% 21.8% 20.8% 20.8%

Depreciation 3.4% 3.2% 2.8% 2.5% 2.3%

Total 28.2% 26.2% 24.6% 23.3% 23.1%


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Again referring to the footnotes on page 37 of the Lowe’s Annual Report, General and

Administrative Expenses the following lists the primary costs classified in each major expense category.

Selling, General and Administrative

Payroll and benefit costs for retail and corporate employees;

Occupancy costs of retail and corporate facilities;

Advertising;

Costs associated with delivery of products from stores to customers;

Third-party, in-store service costs;

Tender costs, including bank charges, costs associated with accepting the Company’s proprietary

credit cards;

Costs associated with self insured plans, and premium costs for stop-loss coverage and fully

insured plans;

Long-lived asset impairment losses and gains/losses on disposal of assets;

Other administrative cost, such as supplies, and travel and entertainment.

The combined percentages for Lowe’s had a steady increase through the years except for

a brief decrease in 2006. Otherwise Lowe’s and Home Depot have steadily increased their expenses

despite the economic troubles. Home Depot had a solid and steady increase from 2005 straight through to

2008, but then dropped slightly in 2009. Home Depot’s total in 2009 was 90.1% just ahead of Lowe’s at

89. 9%. Lowe’s and Home Depot are using different strategies. Although they had higher numbers Home

Depot was not as constant as Lowe’s.

Combined Percentages of Cost of Sales and SG&A

Table 3.3 2009 2008 2007 2006 2005

Lowe's 89.90% 88.80% 87.20% 86.30% 86.60%

Home Depot 90.10% 91.30% 88.40% 86.80% 86.40%

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In comparing both Lowe’s and Home Depot, both companies are increasing the percentages of

their expenses, but Home Depot’s decrease is because its sales are dropping at the same rate as the cost of

sales, and its operating expenses were increasing as a percent because of lower sales, but the amount in

2005 for SG&A was $15,480 (21%) is very close to 2009 at $15,902 (24%) while cost of sales in 2005

was $51,081 (66.3%) and decreases to $43,764 (66.1%) in 2009. Lowe’s, on the other hand, actually

increased SG&A form$9,014 (20.8%) to $11,688 (24.8%) because of its commitment to keeping up

customer service, it kept more of its well trained staff. Lowe’s cost of sales increased from $28,443

(65.8%) in 2005 to $30,757 (65.1%) in 2009. Home Depot’s net sales dropped from $77,019 in 2005 to

$66,176 in 2009, and Lowe’s actually increased from $43,243 in 2005 to $47,220 in 2009. Based on these

numbers Lowe’s is still increasing sales which indicate that its decision to keep sufficient well trained

employees and maintain customer service is a smart one.

***

Next the report focuses on the horizontal analysis of Lowe’s Companies, Inc. financial statements

for the five year period 2005 through 2009. This horizontal analysis compares the percentage of change

from each successive year the totals of net sales, cost of sales, and selling, advertising, general and

administrative expenses from 2005 through 2009. Through this horizontal analysis, the rate of change

can be viewed to see how net sales and cost of sales alter gross profit. Net earnings will also be put into

perspective when net sales are compared to the largest expense category of selling, advertising, general

and administrative expenses. Then Lowe’s can be compared to its largest competitor Home Depot.

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Horizontal Analysis of the Statement of Earnings

First, the cost of sales will be compared to net sales for the years 2005 through 2009. Both net

sales and cost of sales increased at a very similar rate from 2005 through 2007. This started out at

approximately 18% in 2005, followed by a smaller increase of approximately 8% in 2006, and again a

smaller increase of approximately 2.8% in 2007. The year 2008 saw no major change in either net sales

or cost of sales. Net sales and cost of sales both decreased at a similar rate during the year 2009. During

2009 the percentage dropped was approximately 2.5%. These percentages show us that both net sales and

cost of sales are directly related to one another. Gross profit is net sales minus the cost of sales and

selling. Since the percentages were so similar, gross profit follows the percentages increased from 2005

through 2007 before dropping in 2008 and 2009 during the housing slump and slowdown in the economy.

Next, net sales will be compared with selling, advertising, general and administrative expenses.

As stated previously, net sales grew even though at a slower rate each year from 2005 through 2007

before dropping in the years 2008 and 2009. Selling, advertising, general and administrative expenses

grew all five years from 2005 through 2009 even through the downturn in the economy that provided the

decrease in net sales. Net Earnings is directly affected by the comparison of net sales and selling,

advertising, general and administrative expenses. Net earnings increased in 2005 and 2006 when both net

sales and expenses rose. The years 2007 through 2009 saw net earnings decrease each year as selling,

advertising, general, and administrative expenses continued to grow while net sales saw a downturn.

Lowe’s Percentage Rate of Change from 2005 to 2009

Table 4.1 2009 2008 2007 2006 2005

Net Sales -2.1% -0.1% 2.9% 8.5% 18.60%

Cost of Sales -3.1% 0.5% 2.7% 8% 17.50%

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Selling, advertising, general and administrative expenses

5.5% 5.3% 8% 8% 19.20%

Table 4.1: See Horizontal Consolidated Statement of Earnings in appendix C, and a Bar Graph in appendix A

Lastly, the comparison of Lowe’s and Home Depot will be made. These companies sell the same

products and provide the same services, so they are competitive rivals. The downturn in the economy

sparked by the housing crisis should affect both of these companies very similarly. In 2005, both

companies saw an increase in net earnings with Lowe’s posting an increase of 27.3% and Home Depot

posting a 16.7% increase. The year 2006 began to show the differences in the way these companies were

run. Lowe’s again posted a gain of 12.1% while Home Depot posted its first loss at -1.3%. With the

downturn in the economy in full swing, both companies fell in 2007 and 2008 but Home Depot seemed to

be hit harder. Lowe’s showed a drop of -9.5% and -21.9% in 2007 and 2008 respectively while Home

Depot showed losses of -23.7% and -48.6%. The year 2009 also showed a significant change in the

companies. Lowe’s continued to drop by -18.8% while Home Depot rose by 17.7%. Later the reasons

for these differences will be discussed. All data and ratios can be found in the appendices.

Net Earning’s Rate of Change from 2005 to 2009

Table 4.2 2009 Change

in Percentage

2008 Change

in Percentage

2007 Change

in Percentage

2006 Change

in Percentage

2005 Change

in Percentage

Lowe’s -18.8% -21.9% -9.5% 12.1% 27.3%

Home Depot 17.7% -48.6% -23.7% -1.3% 16.7%

Table 4.2: See Horizontal Consolidated Statement of Earnings in appendix C, and a Bar Graph in appendix A

***

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This section focuses on horizontal analysis of the statement of Cash Flows, which displays the

change in each cash flow account from the previous year. Operating, Investing, and Financing Activities

rates of change were calculated by dividing the change in the current account from the previous year’s

number over the previous year’s account value. The degree and direction of change provides insight into a

company’s past and current financial strategy. Everything from organizational expansion to budget cuts is

portrayed in horizontal analysis of the statement of cash flows.

Horizontal Analysis of the Statement of Cash Flows

Rate of change Lowes vs. Home Depot (Operating Activities)

Table 5.1 2009 2008 2007 2006 2005

Lowes -1.60% -5.20% -3.40% 17.20% 25.00%

Home Depot -7.30% -3.50% -25.20% 15.70% -0.20%

Table 5.1: See Statement of Cash flows in appendix C, and a Bar Graph in appendix A.

Over these five years, the rate of change in net cash from operating activities has not been

constant for either company. In the comparison of Lowe’s to Home Depot, from 2005 to 2006 Home

Depot’s rate increased significantly while Lowe’s percentage decreased slightly. In 2006-2007, Lowe’s

rate decreased much less than Home Depot, but both plunged into the negative values. From 2007-2008

the tides turned and Lowe’s rate decreased while Home Depot made a significant increase. Finally, in

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2008-2009 Lowe’s percentage increased and Home Depot decreased. Lowe’s rate of change of net cash

from operating activities over the five-year span has slightly increased in comparison with Home Depots.

The biggest difference between the $4,054 million in the net flow from operations and the $1,783

million in the net earning account is the addition of depreciation to the Operating Activities account.

Lowes uses the indirect method for calculating the Statement of Cash Flows, which starts with Net

earnings then adjusts for non-cash transactions. Since depreciation and amortization is not a cash

transaction, it doesn’t affect the cash position, but is deducted in calculating Net earnings. Its large

number of buildings, trucks, and equipment produces its sizeable Depreciation and amortization expense.

Rate of change of Investing and Financing Activities

Table 5.2 2009 2008 2007 2006 2005

Investing Activities -41.5% -21.8 11.0% 1.1% 55.6%

Financing Activities 91.8% 205.9% -63.7% 207.6% -73.7%


Lowes saw their cash from investing increase less and less each year from 2005-2007. During

this period, Lowes boosted their short-term investments and acquired property at an increasing rate each

year. The company was expanding and putting higher amounts of capital into the purchasing of fixed

assets, which is why their net investing cash flow was increasingly negative. In 2008 and 2009, the rate of

change in their net cash used in investing activities account fell into the negatives. This trend of negativity

began in conjunction with the four quarters of economic recession in 2007 to 2008. The demand for

Lowes to increase their store numbers at steady rate decreased, so they purchased less property than in

previous years.

Lowe’s financing activities has been all over the map in the last five years. In 2004 and 2005

Lowe’s did not borrow for the short-term and were gearing up for heavy expansion. In 2006 and 2007 the

company was expanding rapidly and generated capital through both short-term borrowing and the

issuance of stock. The economic down turn in 2008 and 2009 forced Lowes to stop expanding at such a

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rate, which directly decreased their need to borrow. In these years they stopped borrowing in the short-

term and even started buying back their existing stock.

Table 5.3 2009 2008 2007 2006 2005

Net cash provided by operating activities 4,054 4,122 4,347 4,502 3,842

Purchases of fixed assets 1,799 3,266 4,010 3,916 3,379


The purchasing of fixed assets has not been greater than the cash provided by operating activities

in the last five years. It was close during the intense growth stage, but did not overtake the net cash

provided by operating activities.

Table 5.4 2009 2008 2007 2006 2005

ROE 21.45% 12.85% 17.65% 20.69% 21.45%

ROA 5.98% 7.46% 9.99% 12.22% 12.54%

Financial Leverage position 3.63% 5.39% 7.66% 8.47% 8.92%

Earnings per share (Basic) $1.21 $1.50 $1.89 $2.02 $1.78

Quality of Income 2.27 1.88 1.55 1.45 1.39

Profit Margin 3.80% 4.60% 5.80% 6.60% 6.40%

Fixed Asset Turnover 2.09 2.19 2.39 2.66 2.86

Cash Ratio 0.09 0.03 0.04 0.06 0.07

Inventory turnover 3.74 4.01 4.28 4.46 4.53

Quick Ratio 0.14 0.09 0.07 0.12 0.15

Times Interest Earned 10.84 13.52 24.25 33.45 29.52

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Cash Coverage 17.6 18.02 31.67 37.5 32.42

Debt to Equity 0.73 0.81 0.92 0.77 0.72

Current Ratio 1.32 1.22 1.12 1.27 1.34

Price/Earnings 18.17 12.18 13.98 16.69 17.85

Dividends Yield 1.60% 1.80% 1.10% 0.50% 0.30%

Total Asset Turnover 1.44 1.52 1.65 1.79 1.89

Accounts Payable Turnover 7.33 8.11 8.72 9.67 10.29

Capital Acquisitions Ratio 2.25 1.26 1.08 1.15 1.14


***

The report will now look at each ratio, describe how it is calculated, what it measures, whether

the company has high or low, increasing or decreasing, or steady ratio and whether the ratio is good or

bad for the company in terms of liquidity, profitability, solvency or the market’s view of the company.

Ratio Calculation

Profitability Ratios:

Return on equity relates income earned to the investment made by the owners. It is calculated

by dividing the net income by the average stockholder’s equity. Simply put, it is as simple as investors

expect to earn more money if they invest more. If any two investments offer a $10,000 return, but one

requires a $100,000 investment and the other a $250,000 investment of course the first investment of

$100,000 is a better return. It’s as simple as risking the least amount of money for the highest return on

the investment.

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Return on Equity for Lowe’s

Table 6.1 2009 2008 2007 2006 2005

Lowe’s Net income 1,783 2,195 2,809 3,105 2,771

Lowe’s Average shareholder equity 18,562 17,077 15,912 15,011 12,916

Lowe’s ROE 9.6% 12.9% 17.7% 20.7% 21.5%

Table 6.1: See Ratio calculations in appendix C

Looking at the return on equity for Lowe’s, back in 2005 it was almost double what it is in 2009.

It dropped from 21.5% to 9.6%. The drop is mostly attributed to an increase in average shareholder equity

and a decrease in net income. Table 6.1 shows the net income and how it mostly decreased from 2005

2009 except for a small increase in 2006, and it also shows average shareholders’ equity for the same for

the same period has been steadily increasing causing ROE to decrease.

Lowe’s vs. Home Depot’s ROE

Table 6.3 2009 2008 2007 2006 2005

Lowe's ROE 9.6% 12.9% 17.7% 20.7% 21.5%

Home Depot's ROE 14.1% 13.0% 19.7% 20.3% 22.1%

Table 6.2: See Ratio calculations in appendix C, and a line Graph in appendix A

Comparing Lowe’s to Home Depot helps in deciding if the percent is a good return or a bad one.

In 2009 the ROE for Lowe’s was 9.6% while Home Depot was 14.1%, these percents suggest that Home

Depot’s decision to hire new management to improve performance is working.

Return on assets is another test of profitability that compares income to the total assets used to

earn the income. It can be seen as a better measure than ROE of management’s ability to utilize assets

effectively because it is not affected by financing. If return on equity is high for a company that has high

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debt and another company earned the same return on the same amount of assets but borrowed less money

having less debt is better.

Return on Assets

Table 6.3 2009 2008 2007 2006 2005

Lowe's ROA 6.0% 7.5% 10.0% 12.2% 12.5%

Home Depot's ROA 7.4% 6.3% 9.6% 11.4% 13.7%

Table 6.3: See Ratio calculations in appendix C, and a line Graph in appendix A.

According to Table 6.3 Home Depot is doing a better job of utilizing their assets in 2005 and

2009, but Lowe’s had the advantage in 2006-2008.

Financial leverage percentage measures the advantage or disadvantage that occurs when a

company’s return on equity differs from its return on assets (ROE-ROA). According to the book financial

leverage was defined as the proportion of assets acquired with funds supplied by owners, and the financial

leverage percentage describes the relationship between the return on equity and the return on assets.

Leverage is positive when the rate of return on a company’s assets exceeds the average after-tax interest

rate on its borrowed funds.

Financial Leverage Percent

Table 6.4 2009 2008 2007 2006 2005

Lowe's ROE 9.6% 12.9% 17.7% 20.7% 21.5%

Lowe's ROA 6.0% 7.5% 10.0% 12.2% 12.5%

Lowe's financial leverage 3.6% 5.4% 7.7% 8.5% 9.0%

Home Depot's financial leverage 6.7% 6.7% 10.1% 8.9% 8.4%

Table 6.4: See Ratio calculations in appendix C

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Looking at table 6.4 above Home Depot’s financial leverage looks stronger than Lowe’s in 2009.

In 2005 Lowe’s had a slight advantage to Home Depot. In 2006 Lowe’s financial leverage began

decreasing and continued straight through to 2009, mostly because of the decision to let stockholder’s

equity almost double from 11,535 in 2005 to 19,069 in 2009, causing ROE to decrease by more than half

in the same period. If a company borrows funds at an after-tax rate of return, the difference increases to

the benefit of the owners. Home Depot has done a better job of utilizing this advantage. Lowe’s financial

leverage ratio is lower than Home Depot’s, because it utilizes less debt in its capital structure.

Earnings per share is calculated by dividing net income by average number of shares of common

stock outstanding, and according to the book, it is a measure of return on investment based on the number

of shares outstanding instead of the dollar amounts reported on the balance sheet. EPS is said to be the

single most widely watched ratio.

Earnings per Share

Taable 6.5 2009 2008 2007 2006 2005

Lowe's $ 1.21 $ 1.50 $ 1.89 $ 2.02 $ 1.78

Home Depot $ 1.56 $ 1.37 $ 2.28 $ 2.56 $ 2.64


Home Depot has higher earnings per share than Lowe’s in every year except 2008 when Lowe’s

jumped ahead briefly. Analysts are normally concerned about the quality of a company’s earnings

because these numbers can be manipulated by using different accounting procedures to report higher

income. One method of evaluating the quality of a company’s earnings is to compare its reported earnings

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to its cash flows from operating activities this is done by dividing cash flows from operating activities by

net income.

Quality of Income

Table 6.6 2009 2008 2007 2006 2005

Lowe's $ 2.27 $ 1.88 $ 1.55 $ 1.45 $ 1.39

Home Depot $ 1.96 $ 2.39 $ 1.36 $ 1.45 $ 1.17


A quality of income ratio that is higher than 1 indicates high-quality earnings, because for every

dollar of income there is one dollar or more of cash flow. If the ratio is below 1 it represents lower quality

earnings. The quality of earnings is stronger at Lowe’s consistently every year except 2008 where it

slipped slightly and came back stronger in 2009.

The percentage of each sales dollar, on average, that represents profit is referred to as the profit

margin. It is calculated by dividing net income by net sales revenue. Profit margin is a good measure of

operating efficiency

Profit Margin

Table 6.7 2009 2008 2007 2006 2005

Lowe's 3.8% 4.6% 5.8% 6.6% 6.4%

Home Depot 4.0% 3.2% 5.4% 6.7% 7.3%


Table 6.7 shows that in 2009 each dollar Lowe’s sales generated 3.8 cents of profit, and Home

Depot generated 4 cents of profit for every dollar. Although the difference might seem small it represents

a huge advantage for Home Depot. Profit margin is a good measure of operating efficiency, but be careful

when comparing different industries because it doesn’t consider the resource (i.e., total investment)

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needed to earn income. Some industries have high volume with low profit margin (i.e., food) and others

have low volume with high profit (i.e. jewelry) both are profitable. The trade-off between profit margin

and sales volume can be stated in simple terms: Which is better 5 percent of $1,000,000 or 10 percent of

$100,000? So a larger profit margin is not always better.

Fixed asset turnover compares sales volume with a company’s investment in fixed assets. The

ratio is computed by dividing net sales revenue by average net fixed assets. The fixed asset turnover ratio

is used to analyze capital-intensive companies (i.e. utilities, airlines). Companies that hold large amounts

of inventory and accounts receivable, analysts often prefer to use the asset turnover ratio.

Fixed Asset Turnover Ratio

Table 6.8 2009 2008 2007 2006 2005

Lowe's $ 2.09 $ 2.19 $ 2.39 $ 2.66 $ 2.86

Home Depot $ 2.56 $ 2.65 $ 2.86 $ 3.07 $ 3.23


Home Depot consistently had a higher fixed asset turnover ratio than Lowe’s from 2005-2009. So

Home Depot had a competitive advantage over Lowe’s in terms of its ability to effectively utilize its fixed

assets to generate revenue. In 2009 for each dollar Home Depot invested in property plant and equipment,

the company was able to earn $2.56 in sales revenue, and Lowe’s only earned $2.09 in sales revenue for

similar investments. This comparison indicates that management of Home Depot was able to operate

more efficiently than Lowe’s.

Total Asset Turnover Ratio

Table 6.9 2009 2008 2007 2006 2005

Lowe's $ 1.44 $ 1.52 $ 1.65 $ 1.79 $ 1.89

Home Depot $ 1.61 $ 1.67 $ 1.60 $ 1.63 $ 1.85

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Table 6.9: Table 6.11: See Ratio calculations in appendix C, and a line Graph in appendix A.

In 2009 Home Depot was able to generate $1.61 in revenue for each dollar invested in assets. In

comparison, Lowe’s in the same year only generated $1.44 in revenue for each dollar invested in assets.

Both turnover ratios indicate that Home Depot was able to operate more efficiently than Lowe’s over all.

Lowe’s did have a higher total asset turnover ratio in 2005-2007.

Profitability for Lowe’s looks positive, even in such uncertain times. Lowe’s decision to close

some stores and slow the opening of new stores, all while concentrating energy on the strategy of

maintaining a well trained staff and keeping a sufficient number of employees on hand is paying off.

Liquidity Ratios:

Liquidity refers to a company’s ability to meet its currently maturing debts. Tests of liquidity

focus on the relationship between current assets and current liabilities. This ability to pay current

liabilities is an important factor in evaluating a company’s short-term financial strength. If the company

does not have cash available to pay for purchases on a timely basis it will lose cash discounts and could

have its credit discontinued by vendors.

Because cash is the lifeblood of the business, without cash, a company cannot pay its employees

or meet its obligations to creditors. The cash ratio is a measure of the adequacy of cash available. The

cash ratio is calculated by dividing cash plus cash equivalents by current liabilities.

Cash Ratio

Table 6.10 2009 2008 2007 2006 2005

Lowe's 0.09 0.03 0.04 0.06 0.07

Home Depot 0.14 0.05 0.04 0.05 0.06

Table 6.10: Table 6.11: See Ratio calculations in appendix C, and a line Graph in appendix A.

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Table 6.10 indicates that Home Depot had a higher cash ratio in 2008 and 2009, but Lowe’s was

higher in 2005 and 2006 and they were the same in 2007. The trend was down from 2005-2008 and then

increased in 2009. In 2009 Lowe’s had 9 cents of cash for each $1 of current liabilities, and Home Depot

had 14 cents on hand for every $1 of current liabilities. Most analysts say that it is ok to keep a small cash

ratio because it is not necessary to hold excess cash. It is far better to invest the cash in productive assets

or reduce debt.

The relationship between total current assets and total current liabilities on a specific date is the

current ratio. To calculate the current ratio divide current assets by current liabilities. This ratio measures

the cushion of working capital that companies use to allow for the unevenness in the flow of funds

through the working capital accounts.

Current Ratio

Table 6.11 2009 2008 2007 2006 2005

Lowe's $ 1.32 $ 1.22 $ 1.12 $ 1.27 $ 1.34

Home Depot $ 1.34 $ 1.20 $ 1.15 $ 1.39 $ 1.20


In 2009 Lowe’s had $1.32 in current assets for every $1 in current liabilities, and Home Depot

has a $1.34 in current assets for every $ 1 in current liabilities. Most analysts would consider both to be

fairly strong considering both companies ability to generate cash. Customers expect to find merchandise

in the store when they want it, and it is difficult to predict customer behavior most retailers have

comparatively high current ratios because they must carry large inventories. Home Depot maintains an

inventory of 50,000 different products in each store.

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The quick ratio compares quick assets (cash and near-cash assets) to current liabilities. It is

calculated by dividing quick assets by current liabilities, and is a safety margin that is available to meet a

company’s current liabilities.

Quick Ratio

Table 6.12 2009 2008 2007 2006 2005

Lowe's 0.14 0.09 0.07 0.12 0.15

Home Depot 0.23 0.13 0.14 0.30 0.25


Lowe’s has 14 cents in cash and near-cash for every $1 in current liabilities. Although the number

is low the trend is upward again and that is a good sign. Home Depot has 23 cents for every $1 in current

liabilities better than Lowe’s and again the trend is in the right direction.

Inventory turnover is a measure of both liquidity and operating efficiency. It reflects the

relationship of inventory to the volume of goods sold during the period. It is calculated by dividing cost of

goods sold by average inventory. An increase in this ratio is usually favorable, because most companies

realize profit when inventory is sold. If it is too high that could be an indicator that sales were lost

because of a lack of stock on hand. Lost sales can be higher than lost profit, because when the customer

goes to a competitor to find it the competitor could establish a business relationship with the customer.

Inventory Turnover

Table 6.13a 2009 2008 2007 2006 2005

Lowe's 3.74 4.01 4.28 4.46 4.53

Home Depot 4.20 4.22 4.18 4.33 4.76

Table 6.13a: Table 6.11: See Ratio calculations in appendix C, and a line Graph in appendix A.

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Inventory was turned over 3.74 times per year in 2009 at Lowe’s down from 4.53 in 2005. Home

Depots’ inventory was turned over 4.20 times per year in 2009 also up from 2005 when it was 4.76 times.

Home Depots’ numbers reveal a significant advantage in inventory management they have over Lowe’s.

To compute days’ supplies in inventory just divide days in year by inventory turnover ratio. Table 6.13b,

shows that in 2009, Lowes supplies are sitting in inventory about 10 days longer than Home Depot’s are.

Only in 2006 and 2007 did Lowe’s move inventory faster than Home Depot.

Days’ Supply in Inventory

Table 6.13b 2009 2008 2007 2006 2005

Lowe's 97.7 91 85.3 81.8 80.5

Home Depot 87.0 86.4 87.3 84.2 76.7

Table 6.13b: See Ratio calculations in appendix C, and a line Graph in appendix A.

Accounts turnover ratio is computed by dividing cost of goods sold by average accounts payable,

and it measures how quickly management is paying trade accounts. A high accounts payable ratio

normally suggests that a company is paying its suppliers in a timely manner.

Accounts Payable Turnover Ratio

Table 6.14a 2009 2008 2007 2006 2005

Lowe's 7.33 8.11 8.72 9.67 10.29

Home Depot 9.04 8.96 7.85 7.84 8.66

Table 6.14a: See Ratio calculations in appendix C, and a line Graph in appendix A.

From 2005 through 2007 Lowe’s had a higher accounts payable ratio than Home Depot until

2008 and 2009 when Home Depot increased its ratio and beat Lowe’s. However, because Lowe’s carries

more diverse inventory it doesn’t compare to Home Depot.

Days to Pay Suppliers

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Table 6.14b 2009 2008 2007 2006 2005

Lowe's 49.8 45 41.9 37.7 35.5

Home Depot 40.4 40.7 46.5 46.6 42.2

Table 6.14b: See Ratio calculations in appendix C, and a line Graph in appendix A.

To compute days to pay suppliers just divide days in year (365) by payable turnover ratio. In

2005 it was taking Lowe’s just over 35 days to pay supplier about 7 days faster than Home Depot, and

they were faster in 2006 and 2007. In 2008 Home Depot was paying suppliers ahead of Lowe’s by about

4 days, and by 2009 they were paying suppliers 9 days faster than Lowe’s. The liquidity ratios show that

in 2008 the numbers fall too low and Lowe’s responds by buying back stock, and not continuing to buy

inventory, which allows them to hold onto cash.

Solvency Ratios:

An interest payment is a fixed obligation. A company can be forced into bankruptcy if it fails to

make required interest payments. The times interest earned ratio compares the income a company

generated in a period to its interest obligation for the same period. It represents a margin of protection for

creditors. Times interest earned is calculated by dividing net income; plus interest expense; plus income

tax expense then take the sum and divide by interest expense.

Times Interest Earned Ratio

Table 6.15 2009 2008 2007 2006 2005

Lowe's 10.84 13.52 24.25 33.45 29.52

Home Depot 6.95 6.67 10.78 24.01 65.54

Table 6.15 See Ratio calculations in appendix C, and a line Graph in appendix A.

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In 2009 Lowe’s generated $10.84 in income for each $1 of interest expense, but Home Depot

only generated $6.95 in income for each $1 of interest expense. Back in 2005 it was a much different

picture when Home Depot was generating $65.54 in income and Lowe’s a lower but still strong $29.52.

From 2006 to 2009 Lowe’s dropped by two-thirds and Home Depot dropped ten times. Even though the

trend is down, the ratio is still strong, and indicates a secure position for creditors.

A preferred ratio by many analysts is the cash coverage ratio because it compares the cash

generated by a company to its cash obligations for the period. Cash coverage is calculated by dividing

cash flows from operating activity before interest and taxes paid by Interest paid (from statement of cash

flow). Keeping in mind that analysts are concerned about a company’s ability to make required interest

payments. Looking at Lowe’s cash coverage ratio Lowe’s has $17.60 in cash for every $1 of interest paid,

compared to Home Depot at $11.85. In 2005 Home Depot was at $92.93 in cash for every $1 of interest

paid and Lowe’s was $32.42, so Lowe’s has decreased its cash coverage ratio by almost half, and Home

Depot decreased its cash coverage by closer to nine times what it was in 2005. Although the ratio has

decreased it is still acceptable, Lowe’s cash coverage looks stronger than Home Depot and isn’t

decreasing at as fast a rate, but both companies have enough cash to pay interest.

Coverage Ratio

Table 6.16 2009 2008 2007 2006 2005

Lowe's 17.60 18.02 31.67 37.50 32.42

Home Depot 11.85 11.92 13.28 44.05 92.93


The debt-to-equity ratio is calculated by dividing total liabilities by stockholders’ equity, and it

expresses a company’s debt as a proportion of its stockholders’ equity.

Debt-to-Equity Ratio

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Lowe’s Project

Table 6.17 2009 2008 2007 2006 2005

Lowe's 0.73 0.81 0.92 0.77 0.72

Home Depot 1.11 1.32 1.5 1.09 0.65


Debt is risky because the company must pay required interest payments even if there isn’t

sufficient cash on hand to do so. In contrast dividends are always at the company’s discretion because

they are not legally enforceable until declared by the board of directors. However, despite the risk most

companies obtain resources from creditors because of the advantage of financial leverage. Interest

expense being deductable is another advantage of debt. It is necessary when selecting a capital structure

that a company balance the higher returns available through leverage against the higher risk associated

with debt. The importance of the risk-return relationship keeps most analysts using the debt-to -equity

ratio as a key part of any company evaluation. In 2009 for every $1 of stockholders’ equity, Lowe’s had

0.73 cents worth of liabilities. By comparison, Home Depot’s debt to equity ratio was $1.11. In 2005

Lowe’s was at 0.72 cents and Home Depot was only at 0.65, and the trend with Lowe’s increased steadily

until 2007 and then decreased in 2008 and again in 2009. Home Depot has increased more significantly in

2006 and 2007 and a smaller decrease in 2008 and 2009. Home Depot is carrying higher debt than

Lowe’s and according to the book it is a smarter decision.

The last of the solvency ratios is the capital acquisitions ratio which is calculated by dividing cash

flow from operating activities by cash paid for property, plant and equipment. The capital acquisition

ratio reflects the portion of purchases of property, plant, and equipment financed from operating

activities. A high ratio indicates less need for outside financing for current and future expansion. The

benefits include providing the company opportunities for strategic acquisitions, avoiding the cost of

additional debt and reducing the risk of bankruptcy that comes with additional leverage.

Capital Acquisitions Ratio

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Lowe’s Project

Table 6.18 2009 2008 2007 20062 2005

Lowe's 2.25 1.26 1.08 1.15 1.14

Home Depot 5.31 2.99 1.61 2.16 1.71


Lowe’s capital acquisitions ratio has increased from 1.14 to 2.25 in recent years. Home Depot’s ratio has

also increased from 1.71 to 5.31 in recent years. Lowe’s is putting money into property, plant and

equipment. In 2009, Lowe’s paid down debt and opened fewer stores. Every $1 of property, plant and

equipment generates $2.25 of internal operations. Lowe’s moderate ratio indicates that it has decreased

capital investments in recent years, and Home Depot’s higher ratio may indicate slow growth in sales and

the effect of lower sales on new investments.

Looking at each of the solvency ratios the data for Lowe’s reveals an ability to meet its long-term

obligations. During these difficult times, Lowe’s is making crucial decisions about putting money into

property, plant and equipment, paying down debt, and opening fewer stores is paying off.

Market Tests:

Market test ratios relate the current price per share of stock to the return that accrues to investors.

These ratios are preferred by many analysts because they are based on current value of an owner’s

investment in a company.

The price/earnings ratio measures the relationship between the current market price of a stock and

its earnings per share. It is calculated by dividing current market price per share by earnings per share.

Table 6.19 shows that Lowe’s had a P/E ratio of 18.17, indicating that Lowe’s stock was selling at a price

that was 18.71times its earnings per share. This ratio reflects the stock market’s assessment of a

company’s future performance. The high ratio indicates that the earnings are expected to grow rapidly.

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Comparing the ratio to recent years Lowe’s was decreasing until 2008 when they increased back to 2005

levels in 2009.

Price/Earnings Ratio

Table 6.19 2009 2008 2007 2006 2005

Lowe's 18.17 12.18 13.98 16.69 17.85

Home Depot 18.20 15.72 13.44 15.91 15.36


Lowe’s is more consistent in recent years of keeping its price/earnings ratio higher than Home

Depot except in 2008 when Home Depot was higher and then in 2009 when Home Depot edges ahead

slightly. Both companies are showing better growth potential in recent years.

The dividend yield ratio measures the relationship between the dividends per share paid to

stockholders and the current market price of a stock. The dividend yield ratio is calculated by dividing the

dividends per share by market price per share.

Dividend Yield Ratio

Table 6.20 2009 2008 2007 2006 2005

Lowe's 1.6% 1.8% 1.1% 0.5% 0.3%

Home Depot 3.2% 4.2% 2.9% 1.7% 1.0%


The dividend yield for most stocks is not high compared to alternative investments. Investors are

willing to accept low dividend yield if they expect that the price of a stock will increase while they own it.

Obviously, in 2005, investors who bought Lowe’s stock did so with the expectation that its price would

increase in. In contrast, stocks with low growth potential tend to offer much higher dividend yields than

do stocks with high growth potential. Table 6.20 shows that in 2005 when Lowe’s had a low dividend

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yield of 0.3%, but had reasonable expectations of growth and an increasing stock price. As economic

conditions changed it began increasing the dividend yield to attract investors who aren’t as concerned

with increasing long-term investments but want the higher dividend now. Lowe’s did increase its

dividend yield but at a smaller rate than Home Depot, allowing for higher future stock prices to be stable.

Both companies have increased their dividend yield over recent years as the stock prices have become

less stable. In conclusion, Lowe’s passes both market tests when current market conditions are taken into

consideration. Lowe’s is paying a higher dividend and still keeping the total under 2% allowing future

stock prices to increase.

***

This section of the report focuses on the market price of both Lowe’s and Home Depot’s stock

from the period 2005 through 2010. The discussion will be about the overall trend comparing both of

these company’s stock prices in relation to one another. Market tests and stock prices will be used to

compare Lowe’s to Home Depot. Through this analysis, the comparison will show which company

performed better in the market and the reasons why this appears to take place.

Market Price

First, the price of Lowe’s stock will be discussed. In 2005 the stock price for Lowe’s started at

$28.50 and the company saw increases in 2006 and 2007. The housing market began to collapse in 2007

and that effect was shown by the decrease in stock prices in 2008 and 2009 before a slight rebound in

2010 when it began the year at the price $21.99. When looking at Home Depot, a similar situation

occurs. In 2005 the stock price for Home Depot started at $41.26 and the years 2006 and 2007 saw little

change. Then following the same downward trend as Lowe’s, the housing market crisis caused a severe

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drop in 2008 and 2009 before a slight rebound in 2010 when it began the year at $28.39. When

comparing the 5 year cycle of stock prices for both companies, both companies trended in the same

direction nearly the entire time. However, when comparing percentages of increase or decrease for the

five year period, it clearly shows that Lowe’s consistently performed better during the entire period. This

comparison chart can be viewed in the appendix. For yearly market prices see the below table.

Beginning Year Stock Market Price

Table 7.1 2005 2006 2007 2008 2009 2010

Lowe’s $28.50 $31.78 $33.71 $26.43 $18.27 $21.99

Home Depot $41.26 $40.55 $40.74 $30.64 $21.53 $28.39

Table 7.1: See Stock Market chart in appendix A-7

Market Tests

Market Tests are defined as: Ratios that tend to measure the market worth of a share of stock.

The market tests used in this section to compare the stock prices of Lowe’s and Home Depot are the

Price/Earnings Ratio and the Dividend Yield Ratio. The Price/Earnings Ratio is the current market price

per share divided by earnings per share. Lowe’s Price/Earnings Ratio in 2005 started out at 17.85%

before a slight drop-off each successive year 2006, 2007, and 2008 before a significant increase in 2009

to 18.17%. Home Depot’s Price/Earnings Ratio in 2005 started out at 15.36% before also dropping in

2006 and 2007, but the company saw an increase in 2008 and 2009 when it finished at 18.20%. These

percentages are quite similar for both companies; however, dividends Yield are a bit different. The

Dividends Yield Ratio is dividends per share divided by market price per share. Lowe’s Dividends Yield

Ratio in 2005 was 0.3% and it increased in successive years 2006, 2007, and 2008 before a slight drop to

1.6% in 2009. Home Depot’s Dividend Yield in 2005 was 1% and it also increased in successive years

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2006, 2007, and 2008 before slightly dropping to 3.2% in 2009. Home Depot’s Dividend Yield was

clearly higher each year as a percentage. Please see the Ratio chart below

Market Tests

Table 7.2 2005 2006 2007 2008 2009

Lowe’s

Price/Earnings

17.85% 16.69% 13.98% 12.18% 18.17%

Home Depot

Price/Earnings

15.36% 15.91% 13.44% 15.72% 18.20%

Lowe’s Dividends

Yield

0.3% 0.5% 1.1% 1.8% 1.6%

Home Depot

Dividends Yield

1.0% 1.7% 2.9% 4.2% 3.2%

Table 7.1: See Ratio calculations in appendix C, graph in appendix A

Final Thoughts

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As seen previously, Lowe’s appears to be outperforming Home Depot in the stock market during

the period from 2005 through 2010. By looking at the previously discussed market prices and market

tests, it appears a major contributor to this is Dividends Yield. Home Depot pays a higher dividends yield

every single year from 2005 through 2010. If companies choose not to pay dividends, this can work to

the benefit of the shareholder as it will increase company earnings, making the stock worth more in the

future. So by Lowe’s withholding dividends and keeping higher retained earnings, it helps to improve

future stock performance. This is one of the many reasons Lowe’s outperformed Home Depot in the

stock market during the period 2005 through 2010.

***

The final focus of the report will be to identify and discuss five strengths and five weaknesses of

Lowe’s connected to their strategies, products, market competition, economy and financial performance.

Lowe’s Strengths and Weaknesses

Strengths:

1. Lowe’s decision to buy back stock and retire the stock helped keep stock price steady

through unstable economic difficulties. As foreclosures were slowly increasing from

2007 to 2008 the effects were felt first in the home improvement markets. Lowe’s began

repurchasing its stock to attempt to keep stock prices from plunging. The sudden collapse

in the housing markets could have caused a sell-off of home improvement stocks. Lowe’s

and Home Depot repurchased their stocks to limit shares available and keeping prices

stable.

2. Lowe’s commitment to customer service is evident in its decision to staffing its stores

with knowledgeable employees to provide the service that its customers have come to

expect. In 2009 the average tenure of a Lowe’s store manager increased to more than

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Lowe’s Project

eight years, providing an experienced and knowledgeable leadership base. In other words

experienced management and well trained employees offer each customer a positive

experience when they come to Lowe’s. Because there are enough employees to handle

the needs of customers and the employees can answer the customer’s do-it-yourself

questions. The positive experience when visiting Lowe’s will translate into higher sales

and repeat customers.

3. Lowe’s has re-evaluated its future store expansion plans to ensure it makes effective use

of its capital, which resulted in a reduction in the number of stores it expects to open in

2010. Lowe’s will discontinue certain future store projects. The principles that drive its

store-expansion plans include a focus on high-volume, metro-market opportunities,

particularly in markets where it has minimal coverage, projects that minimize the effects

of cannibalization, and projects that will allow it to maintain consistently strong returns

on new store capital investments.

4. Lowe’s has planned its inventory purchases conservatively across seasonal categories.

Lowe’s maintains competitive assortments and experienced strong sell through, resulted

in fewer markdowns of these products. In tools, it purchased more core products to

minimize markdowns. These efforts helped Lowe’s continue increasing margins and

effectively manage its working capital during the downturn. Resulting in Lowe’s ending

the year with a 3.6% lower comparable store inventory compared to 2008.

5. Lowe’s increased its dividends because in the current economic climate keeping

shareholders happy is important. Lowe’s pays out dividends to keep investors. Lowe’s

pays less than 2% walking the line of paying out today, but not too much because

reinvestment of retained earnings is important to keep future stock prices high.

Weakness:

40

Lowe’s Project

1. Lowe’s didn’t go global. It is available in Canada and the Mexico, but they never went

global. A global market can help in economic downturns because while the U.S. is

having problems developing countries like India will still be buying product and off

setting losses.

2. Buying back stock and retiring the stock can also be a weakness it will get shares off of

the market, but it can also be viewed negatively by investors because it is a message that

management can’t find new profitable projects to undertake. Replacing equity by debt is

naturally the very essence of financial leverage. If Lowe’s was substantially unleveraged

before, the replacement would be appropriate.

3. Lowe’s decision to not have accounts receivable is keeping them from earning the

interest, and GE wouldn’t do it if it wasn’t profitable, so it may as well be Lowe’s profit.

4. Home Depot is in better a better position when it comes to their financial leverage.

Lowe’s ratio is lower because it utilizes less debt in its capital structure than Home

Depot.

5. Lowe’s is moving toward expansion again preparing that the worst is behind us, and with

the economic uncertainty still lingering out there this could be a risky strategy.

Two recommendations:

1. Lowe’s isn’t utilizing its debt as efficiently as Home Depot. It would benefit Lowe’s to

either invest more effectively (higher return) or borrowing more effectively (lower rate of

interest).

2. Lowe’s could also benefit from going global. Home Depot has gone global and Lowe’s

although it is available in Canada and Mexico hasn’t expanded globally to the extent that

Home Depot has. When the United States is experiencing an economic down turn they

could offset some of the losses by capitalizing on China and India’s expansion efforts.\

41

Lowe’s Project

***

Conclusion

Lowe’s is making speculative decisions about future market conditions. In today’s market,

uncertainty is everywhere. Unemployment pushing 10%, falling home prices, reduced access to credit,

and shrinking consumer confidence have contributed to a sharp decline in consumer spending. Adding to

these uncertainties a new administration means new environmental regulations local zoning issues and

more stringent land-use regulations.

Lowe’s is soldiering on to make forward thinking decisions like maintaining a workforce that

keeps customers happy and workers off of unemployment. The decision to reduce costs by closing low

producing stores and focusing on successful stores at this point seem to be working. Its stock price is

stable, and the future outlook is promising. In difficult times, those who don’t panic and make intelligent

forward thinking decision become the winners in tomorrow’s market place.

42

Lowe’s Project

Appendix A (Graphs)

43

2009

2008

2007

2006

2005

0.00% 20.00% 40.00% 60.00% 80.00% 100.00%

Lowe's Three Largest AssetsBar Graph 1.1

TotalOther noncurrent assetsProperty, net Long-term investmentsMerchandise inventoriesShort-term investmentsCash and cash equivalents

Lowe’s Project

44

2009

2008

2007

2006

2005

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Lowe's Three Largest LiabilitiesBar Graph 1.2

TotalOther long-term liabilitiesLong-term debtOther current liabilitiesAccounts Payable

Lowe’s Project

45

20092008

20072006

2005

1.321.22

1.121.27 1.34

1.34

1.21.14999999999999

1.39

1.2

Current Ratio (Graph 2.1)Lowe's Home Depot

20092008

20072006

2005

0.14

0.09

0.070.12 0.15

0.23

0.13 0.14

0.3

0.25

Quick Ratio (Graph2.2)Lowe's Home Depot

Lowe’s Project

Appendix A

46

Lowe's Home Depot-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Percentage rate of change for long-term debt (Graph 2.7)

20092008200720062005


0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

Percentage rate of change for Property less accumulated depreciation (Graph 2.5)

20092008200720062005

Lowe's Home Depot

-0.1

-0.05

0

0.05

0.1

0.15

Percentage rate of change for asset mer-chandise inventory (Graph 2.4)

20092008200720062005

Lowe's Home Depot

-25

-20

-15

-10

-5

0

5

Percentage rate of change for cash and cash equivalents (Graph 2.3)

20092008200720062005

Lowe’s Project

20052006

20072008

2009-5

0

5

10

15

20

Lowe’s Percentage Rate of Change from 2005 to 2009 Graph 4.1

Perc

ent C

hang

e

47

Lowe's Home Depot

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

Percentage rate of change for retained earn-ings (Graph 2.8)

20092008200720062005


0

0.5

1

1.5

2

2.5

3

3.5

Percentage rate of change for long-term debt (Graph 2.7)

20092008200720062005

Lowe’s Project

20052006

20072008

2009

-50

-40

-30

-20

-10

0

10

20

30

Net Earning’s Rate of Change from 2005 to 2009 Graph 4.2

Perc

ent C

hang

e %

Appendix A

2009 2008 2007 2006 2005

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

Rate of Change Lowe's vs Home Depot Graph 5.1

48

Lowe’s Project

Appendix A

2009 2008 2007 2006 20050.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Lowe's vs. Home Depot's ROEGraph: 6.1

Lowe's ROEHome Depot's ROE

Perc

enta

ge o

f Ret

urn

on e

quit

y

49

Lowe’s Project

2009 2008 2007 2006 20050.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Lowe's vs. Home Depot's ROAGraph: 6.3

Lowe's ROAHome Depot's ROA

Perc

enta

ge o

f ret

urn

on a

sset

s

50

Lowe’s Project

2009 2008 2007 2006 2005 $-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Earnings per ShareGraph: 6.6

Lowe'sHome Depot

2009 2008 2007 2006 20050.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Profit Margin Graph: 6.7

Lowe'sHome Depot

2009 2008 2007 2006 2005 $-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Fixed Asset Turnover RatioGraph: 6.8

Lowe'sHome Depot

51

2009 2008 2007 2006 20050.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Lowe's vs. Home Depot's Financial Leverage Percentage Graph: 6.4

Lowe's financial leverageHome Depot's financial leverage

Lowe’s Project

52

2009 2008 2007 2006 2005 $-

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

Current RatioGraph: 6.11

2009 2008 2007 2006 20050

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

Cash Ratio Graph: 6.10

2009 2008 2007 2006 2005 $-

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

Total Fixed Asset Turnover RatioGraph: 6.9

Lowe’s Project

2009 2008 2007 2006 20050

0.05

0.1

0.15

0.2

0.25

0.3

0.35

Quick RatioGraph: 6.12

2009 2008 2007 2006 2005 $-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

Inventory TurnoverGraph:6.13a

53

2009 2008 2007 2006 20050

20

40

60

80

100

120

Days Supply in InventoryGraph: 6.13b

Lowe’s Project

2009 2008 2007 2006 20050

2

4

6

8

10

12

Accounts Payable Turnover RatioGraph: 6.14a

2009 2008 2007 2006 20050

10

20

30

40

50

60

Days to Pay SuppiersGraph: 6-14b

54

2009 2008 2007 2006 20050

10

20

30

40

50

60

70

Times Interest Earned RatioGraph: 6.15

Lowe’s Project

2009 2008 2007 2006 20050.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

Cash CoverageGraph: 6.16

2009 2008 2007 2006 20050

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Debt to EquityGraph: 6.17

2009 2008 2007 20062 20050

1

2

3

4

5

6

Capital Acquisition RatioGraph: 6.18

55

Lowe’s Project

2009 2008 2007 2006 20050.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

Price/Earnings RatioGraph: 6.19

2009 2008 2007 2006 20050.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Dividend Yield RatioGraph: 6.20

56

Lowe’s Project

Appendix A

2009

2008

2007

2006

2005

0.00%2.00%

4.00%6.00%

8.00%10.00%

12.00%14.00%

16.00%18.00%

20.00%

Market TestsChart 7.2

Home Depot's Dividends yieldLowe's Dividends yieldHome Depot's Price earningsLowe's Price earnings

Lowe’s Stock Price (2005-2010)

57

Lowe’s Project

Home Depot’s Stock Price (2005-2010)

58

Lowe’s Project

Appendix B

Ratio calculations:

Test of Profitability Basic Computation

1. Return on equity (ROE) Net Income

Average Stockholders' Equity

2. Return on assets (ROA) Net Income + Interest Expense(net of tax)

Average Total Assets

3. Financial leverage percentage Return on Equity - Return on Assets

4. Earnings per share (EPS) Net Income

Average Number of Shares of

Common Stock Outstanding

5. Quality of income Cash Flow from Operating Activities

Net Income

6. Profit margin Net Income

Net Sales Revenue

7. A) Fixed asset turnover ratio Net Sales Revenue

Average Net Fixed Assets

59

Lowe’s Project

B) Total Asset Turnover Net Sales

Average Total Asset

Test of Liquidity

8. Cash ratio Cash + Cash Equivalents

Current Liabilities

9. Current ratio Current Asset

Current Liabilities

Current Liabilities

10. Quick ratio

11. Receivable turnover ratio

Quick AssetsCurrent Liabilities

Net Credit Sales

Average Net Receivables

12. A) Inventory turnover ratio Cost of Goods SoldAverage Inventory

B) Accounts payable turnover Cost of Goods Sold

Average Account Payable

Tests of Solvency

13. Times interest ratio Net Income + Interest Expense+

Income Taxes Expense Interest Expense

14. Cash coverage ratio Cash Flow from Operating Activities

(before interest and tax paid)Interest Paid

60

Lowe’s Project

15. A) Debt-to-equity ratio Total Liabilities

Stockholders' Equity

B) Capital Acquisitions Net Cash Flow from Operations

Cash Paid for Fixed Assets

Market Tests

16. Price/earning ratio Current Market Price per Share

Earnings per Share

17. Dividends yield ratio Dividends per Share

Market Price per Share

61

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