THD vs Lowes balance sheet &Financial Analysis

1 Home Depot Vs Lowe

The Home Depot vs. Lowe's Financial Analysis

(Authors: ASB - R K Patham Iyer, Sathish L.J and Manesh Mohanan)

Introduction

If you do any kind of home remodeling in USA--whether something as simple as painting your kitchen,

or on up to full-scale remodeling in the capacity of a contractor or homeowner--then Lowe's and Home

Depot are a fact of life. They may be your best buddies or worst enemies, but they are not going away.

Even most Do it Yourselfers agree that it make sense to patronize one of these companies ( Lowes and

Home Depot) for their hardware and lumberyard requirements because with these companies one does

less running around. Lowes (Lowes) and Home Depot (HD), both US based companies, competitors in

the every growing market of Home Improvement products and services

Section A: Business description

The Home Depot:

The Home Depot, is the worlds largest home improvement retailer was founded in 1978, didn't made

huge impact in the beginning. Unlike traditional contractor-dominated stores, they wanted to serve the

do-it-yourself homeowner. The Home Depot stores sell a wide assortment of building materials, home

improvement products and lawn and garden products and provide a number of services. The Home

Depot stores ( 2256 stores) located throughout the United States including the Commonwealth of

Puerto Rico and the territories of the U.S. Virgin Islands and Guam, Canada and Mexico (each store

average approx 130,000 Sq Ft area).Home Depot caters to both do-it-yourselfers and professional

customers who serve the home improvement construction and building maintenance market segments.

Lowes Inc.

Lowes Companies, Inc. and subsidiaries (Lowes established in 1952) is the worlds second largest

home improvement retailer. They operate 1,754 stores, comprised of 1,715 stores across 50 U.S. states,


34 stores in Canada and five stores in Mexico. These stores represent approximately 197 million square

feet of retail selling space. It is a $50 billion retailer of a complete line of home improvement products

and equipment. The company serves more than seven million do-it-yourself and commercial business

customers each week. Lowe's is the world's second largest home improvement retailer and the 14th

largest retailer in the US. Lowes offers MyLowes, a new online tool for the home improvement

industry.

Section B: Trend Analysis

Industry overview

Overall Analysis of Home improvement industry indicates that home improvement retailers have been

impacted by the downturn in the housing market, uncertain real estate market due to tight credit

approvals, low confidence consumers due to uncertain economic conditions including high job

insecurity etc. Management at both Home Depot and Lowes agree that their companies growth has

decoupled from the housing market and is now more reliant on GDP growth.

These retailers allocation of sales to more

expensive, discretionary type purchases (major

remodel projects) has come down to about 30%

of the total. The Cost vs. Value survey

conducted by Remodeling Magazine, which

estimates the return of remodeling projects,

continues to show a downward trend (Exhibit

1).


One good sign was that remodeling costs had come down, as contractors become more competitive and

consumers look to scale down on quality and/or options. Unfortunately, home values continue to fall,

making it less attractive and/or financially feasible for home owners to remodel. This should keep the

ratio low for the near future since we believe it will be years before US could experience a sustained

recovery in home prices.

While Home Depot and Lowes have struggled through the recession, there are some signs that home

improvement spending has, at least, stabilized. Various economic indicators, while weak, are off the

lows seen in early 2009.

Home or residential renovation is a $350 billion industry in the United States, and a $60 billion industry in

Canada. The average cost per project is $3,000 in the United States and $11,000-$15,000 in Canada

(Wikipedia.com, Home Improvement April, 2010). Home Depot and Lowes are the first and second highest

ranking (respectively) home improvement retail stores in the world. Combined these two companies produced

$125.3 billion in sales for fiscal years ending February, 2013

Revenue Trend

In this section, we have compared the trends under various heads between The Home depot and Lowes.

Home Depots results are primarily compared against Lowes, its key competitor and the second largest

home improvement retailer in North America.

Refer Appendix 1- Figure 1

From the graph Appendix 1- Figure 1 we can derive that the revenues for HD has peaked in Year 2007

and has seen fluctuating revenue from year 2008 onwards. On the other hand Lowes has seen a steady

growth over the last 10 years. In 2008, there is a steep fall in revenue for Home Depot. That is directly


proportional to the overall dip in housing industry in US after sub-prime crisis during the economic

recession.

Adverse conditions in or sustained uncertainty of the economy could adversely impact consumer

confidence, causing the customers to delay purchasing or determine not to purchase home improvement

products and services. Other factors including high levels of unemployment and foreclosures, interest

rate fluctuations, fuel and other energy costs, labor and healthcare costs, the availability of financing,

the state of the credit markets, including mortgages, home equity loans and consumer credit, weather,

natural disasters etc could further adversely affect demand for home improvement products In spite of

all these factors THD maintained the market leadership position for the last 10+ years

Revenue year over year growth rates Trend

Refer Appendix 1- Figure 2

Historically during the period of 1995 to 2000, the growth rates were high for both Home Depot and

Lowes. This is due to the increase in general household income across US due to advancement in

technologies like internet, mobility and high global demand for sophisticated products. From 2001 to

2007, the growth rate of both companies is relatively stable due stable market conditions and no spike

in demand or new advent of technology. But in 2008 there is a steep fall in growth rate to the extent it

went to negative growth for both the companies. In 2011, both the companies reported a positive

growth rate. But surprisingly, after 2011 there was a slide in Lowes growth rate when market was

picking up. It shows that Home depot started to eat up Lowes market share during that period.

Net profit after tax by sales

Refer Appendix 1: Figure 4

Till 2007 the Net profit after tax sales figure was relatively stable for both the companies, though Home

Depot had a higher average figure consistently. But in 2008 there is a steep decline in profit by sales%.

The Home depot witnessed a steeper dip during that period. But interestingly, Home depot reorganized


their operations and started to improve right from 2009 itself that is even before the overall market

started to pickup. On the other hand Lowes somewhat stabilized this figure from falling but could not

improve it. The gap between Home Depot and Lowes is highest in 2013. That shows Home depot has a

better supply chain and cost control mechanism when compared to Lowes.

Section C: Ratio Analysis

The project team has analyzed certain key ratios and articulated their inference below. ( For other ratio

analysis refer to appendix)

Return on Equity Ratio

Notes & Observation:

ROE= Profit after tax Avg. Shareholders equity

Graph shows the return on the Shareholders Equity

While HD maintained a steady growth in ROE, Lowe's ROE remain flat

Compared to Lowe's, HDs ROE is growing at a faster rate

RETURN ON SALES

Notes & Observations:

Return on Sales= Profit after tax Sales

This is Primary measure of company's operating performance

HD's profit margin is consistently higher for last 3 years, able to manage economic challenges better.

Lowe's high merchandise cost lead to low profit margin, competing with same price level as HD.

ASSET TURNOVER


Asset Turnover Ratio = Sales Total Assets

Measures firm's efficiency in utilization of

assets

Home Depot has consistently higher Asset

turnover ratio, it manager its assets more

efficiently.


Return on Assets (ROA)


ROA= profit after tax Total Assets

This ratio indicates the efficiency of Asset used in a company

THD maintained a steady increase in ROA. It increased its ROA by 1.5% in 2013.

Lowes in the same time period increased its ROA only by 0.4%

Clearly THD has a better utilization of their assets

Turn over Ratios

Current Ratio


Current Ratio= Current assets Current Liabilities Indicates a companys liquidity; measures a

company's ability to pay short-term obligations.

Higher the ratio the better.

Home Depot Inc.'s current ratio improved from 2011 to 2012 but then slightly deteriorated from

2012 to 2013 not reaching 2011 level.

Lowes seen decreased current ratio that is due to the increased current liabilities.

Quick Ratio


Quick Ratio= (cash + short-term marketable investments + receivables) current liabilities

HD is comparatively better position to Lowes to pay off its current liabilities with the liquid assets in its books.

Lowes is showing a downturn in quick ratio in 2013 which implies that it is more susceptible to default

when compared to HD


Debtor Turnover


Debtor turnover ratio= Sales avg debtors HD has a steady decline in Debtor turnover ratio

which is good.

The majority of the Lowes accounts receivable arises from sales of goods and services to

commercial business customers. The Company has

an agreement with GE Capital Retail (GE) under

which GE purchases at face value commercial

business accounts receivable originated by the

Company and services these accounts. Hence no

AR reported in the balance sheet *[source Lowes

annual Report]

Debt Collection Period


Debtor collection Period= 360 debtor turnover

This data could not be compared since debtors for Lowes has been sold to GE capital

Inventory Turnover


Inventory Turnover= Cost of Goods sold Avg

Inventories

A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either

strong sales or ineffective buying.

Lowe's Cos. Inc.'s inventory turnover improved from 2011 to 2012 but then slightly deteriorated from 2012 to 2013 not reaching 2011 level.


Debt to Equity Ratio


This ratio relates how much debt a company

has in proportion to its equity.

Of the two, Lowe's Debt to Equity Ratio is

increasing at a higher rate than HD.

Comparatively HD has a better Debt to

Equity Ratio in 2013.

Earnings Per Share


Earnings /share= Profit After Tax wt avg

shareholders equity outstanding

This ratio indicates the health of the equity

share

Conclusion

A closer scrutiny of their annual reports indicates that Home Depot has outperformed Lowes.

Operationally, Home Depot has followed through on its initiatives to improve its supply chain logistics

and merchandising efforts. While both companies have improved margins and growth, Home Depot has

executed at a higher rate. Not only is Home Depot improving the bottom line because of operational

enhancements, but it is also increasing market share given efforts to drive the top line.

Leverage and coverage have been steady for both Home Depot and Lowes. Over the past five years

both companies have decided to add leverage to their balance sheets to benefit shareholders via sizable

share buybacks. Home Depot has had a more dramatic change in credit profile, as exemplified by credit

ratings which fell from low double-A to high triple-B in 2007. Home Depot announced a $22.5 billion


share repurchase plan and sold its HD Supply business. Lowes has been operating with a more

moderate balance sheet. Through the economic recession both companies managed their cash flow in a

very conservative manner by halting new store openings and freezing share repurchase plans. Sales and

profit trends are stronger for The Home Depot. Further, Home Depot's spiking returns on invested

capital demonstrate the power of a business that's positioned to reap gains from an improving housing

market. That's why Home Depot could be a great buy for long-term investors.

And the winner is Home Depot!!!

Acknowledgements:

1) The Home Depot Annual Reports

2) The Lowes Group Annual Reports

3) http://www.stock-analysis-on.net/NYSE/Company/Home-Depot-Inc/Ratios/

4) http://www.investopedia.com/university/ratios/operating-performance/ratio3.asp

5) http://www.forbes.com/

6) http://investorplace.com/2012/08/home-depot-vs-lowes-its-no-contest/

7) Prof. Srinivasa Rangan, Professor @IIM Bangalore

8) Ratio Analysis Reference from Financial Accounting: A Managerial Perspective 4th Edition


APPENDIX 1

Figure 1.1: Revenue Trend

HD Vs Lowes (In Billions)

Figure 1.2: Growth rate in Revenue Trend -

HD Vs Lowes

Figure 1.3: Net Profit after tax trend

HD Vs Lowes

Figure 1.4: Net Profit after tax/Sales in %

trend - HD Vs Lowes


Appendix 2

Some other Key Ratios on HD and Lowes

Figure 2.1: Net Operating Profit Margin

Net Operating Profit Margin= Net Operating

profit Sales

Figure 2.2: Leverage Measure

Leverage Measure= Avg Total Assets Avg share holders equity

Figure 2.3: Inventory Holding Period (days)

Inventory Holding Period= 360/Inventory Turnover

HD has healthy Inventory holding period compared

to Lowes

Figure 2.4: Operating Cycle ( Days)

Ops Cycle= Debt collection period+ Inventory

Holding period

Shorter is better however this need not be true

in all cases


Appendix 3

Facts & Figures: HD & Lowe

Ratio Analysis Summary HD HD HD Lowe Lowe Lowe

Year 2013 2012 2011 2013 2012 2011

Return on Equity (ROE) 25.4% 21.1% 17.4% 12.9% 10.6% 10.8%

Return on Sales or Profit Margin 6.1% 5.5% 4.9% 3.9% 3.7% 4.1%

Asset Turnover 183% 175% 168% 153% 149% 146%

Return on Assets 11.1% 9.6% 8.2% 5.9% 5.5% 6.0%

Leverage Measure 1 230% 220% 210% 215% 194% 181%

Net Operating Profit Margin 10.5% 9.5% 8.6% 7.0% 6.5% 7.3%

Net Operating Asset Turnover 19.88 12.83 10.11 8.81 6.46 5.30

Return on Net Operating Assets 2.09 1.21 0.87 0.62 0.42 0.39

Earnings per Share 3.03 2.49 2.03 1.70 1.44 1.43

Debt to Equity Ratio 1.31 1.26 1.12 1.36 1.03 0.86

Interest Coverage 12.42 10.96 10.99 7.78 8.39 10.02

Current Ratio 1.34 1.55 1.33 1.27 1.28 1.40

Quick Ratio 0.41 0.45 0.28 0.15 0.22 0.23

Debtor Turnover 56.63 60.42 66.37 No data No Data No Data

Debt Collection Period 6 6 5 No data No data No data

Inventory Turnover 4.6 4.5 4.2 3.9 3.9 3.8

Inventory Holding Period 79 81 86 93 92 95

Operating Cycle 85 87 91 95 92 93

Profit & Loss Account:

PL Statement HOME DEPOT INC LOWE'S COMPANIES INC

Data Date 2013 2012 2011 2013 2012 2011

Revenue Total 74754 70395 67997 50521 50208 48815

Cost of Goods Sold 48912 46133 44693 33194 32858 31663

Gross Profit (Loss) 25842 24262 23304 17327 17350 17152

Research and Development Expense

0 0 0 0 0 0

Selling, General and Administrative Expense

16411 16028 15849 12244 12593 12006

Depreciation and Amortization

1568 1573 1616 1523 1480 1586

Operating Income After Depreciation

7863 6661 5839 3560 3277 3560


Nonoperating Income (Expense)

23 16 18 40 22 26

Income before Taxes 7886 6677 5857 3600 3299 3586

Income Taxes - Total 3351 2794 2519 1641 1460 1576

Income Before Extraordinary Items

4535 3883 3338 1959 1839 2010

Extraordinary Items and Discontinued Operations

0 0 0 0 0 0

Net Income (Loss) 4535 3883 3338 1959 1839 2010

Interest and Related Expense Total

635 609 533 463 393 358

Balance Sheet HOME DEPOT INC LOWE'S COMPANIES INC

Data Date 2013 2012 2011 2013 2012 2011

Cash and Short-Term Investments

2494 1987 545 666 1300 1123

Receivables - Total 1395 1245 1085 0 0 0

Inventories - Total 10710 10325 10625 8600 8355 8321

Current Assets - Other - Total 773 963 1224 518 417 523

Current Assets - Total 15372 14520 13479 9784 10072 9967

Property, Plant and Equipment - Total (Net)

24069 24448 25060 21477 21970 22089

Intangible Assets - Total 1170 1120 1187 0 0 0

Other Long term Assets 473 430 399 1405 1517 1643

Assets - Total 41084 40518 40125 32666 33559 33699

short term borrowings 1321 30 1042 47 592 36

Accounts Payable - Trade 5376 4856 4717 4657 4352 4351

Income Taxes Payable 22 23 13 0 0 0

Current Liabilities - Other - Total

4743 4467 4350 3004 2947 2732

Current Liabilities - Total 11462 9376 10122 7708 7891 7119

Long-Term Debt - Total 9475 10758 8707 9030 7035 6537

Other Long term Liabilities 2370 2486 2407 2071 2100 1931

Liabilities - Total 23307 22620 21236 18809 17026 15587

Stockholders Equity 17777 17898 18889 13857 16533 18112

Liabilities plus Shareholders Equity

41084 40518 40125 32666 33559 33699

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