Financial Analysis The Home Depot

Income Statement Revenue increase by 10.2% Net earnings decrease by 1.3% Due to increase in operating expenses by 11.5% due to increase expenditure on the new EXPO CENTER Sales Growth (%) strong growth since 2000 above industry average Lowes growth is a cause for concern outperforming Home Depot 2000 2001 2002 2003 2004 2005 Annual Growth Home Depot 17.09 8.77 11.28 12.77 11.52 11.44 12.12 Lowes 15.63 20.25 18.1 18.24 18.59 8.52 16.49 Industry 6.35 7.51 10.22 12.62 7.93 8.89 8.9 Net Income Growth (%) Strong net income growth but outperformed by Lowes Due to higher operating expenses Higher cost of goods sold 2000 2001 2002 2003 2004 Home Depot 17.94 20.37 17.47 16.19 16.74 Lowes 24.71 46.44 22.18 19.92 27.6 Industry n/a 36.67 22.87 16.58 10.58 Operating Profit Margin Measures pricing strategy and operating efficiency Consistently outperformed industry and competitor up to 2005 2006 and 2007 drop due to higher operating cost 2000 2001 2002 2003 2004 2005 Home Depot 9.2 9.2 10 10.6 10.8 11.5 Lowes 7.5 8.2 9.8 10 10.1 10.8 Industry 8.8 7.7 8.6 9.1 9.2 8.8 Net Profit Margin (%) Higher across the board till 2005 2006 onwards losing out to competitor due to drop in net sales and increased operating cost

2005 Annual Growth 11.44 14.32 12.3 25.1 5.56 14.42

2006 10.6 11 8.8

Home Depot Lowes Industry

2000 5.6 4.3 8.8

2001 5.7 4.7 7.7

2002 6.3 5.7 8.6

2003 6.6 5.9 9.1

2004 6.8 5.9 9.2

2005 7.2 6.4 8.8

2006 6.3 6.6 8.8

Return on Equity (%) Consistently better than competitor and the industry average 2000 18.9 15.9 20.3 2001 18.4 16.6 16.7 2002 19.3 19.8 21.1 2003 20.4 19.5 23.6 2004 21.5 20 27.8 2005 22.9 21.4 27.4 2006 22.2 20.7 24.7

Home Depot Lowes Industry

Return on Assets (%) Efficient use of assets to generate earnings since 2002-2005 Decline in 2006 due to decline in net income, increase operating exp. Due to remodelling of stores, and increased in interest expense 2000 2001 2002 2003 2004 2005 2006 Home Depot 13.4 12.7 13 13.4 13.6 14 11.9 Lowes 8 8 9.9 10.4 10.9 12.1 11.8 Industry 9.8 8.2 9.4 9.7 10.2 10.2 9.8 Current Ratio Ability to pay short- term debts with its short term assets Ratio is healthy but shows a marked decline in 2005 Mainly attributable to decrease in net receivables 2000 2001 2002 2003 2004 Home Depot 1.8 1.6 1.5 1.4 1.4 Lowes 1.4 1.6 1.6 1.6 1.2 Industry 1.6 1.7 1.8 1.8 1.8 Debt to Equity Ratio Low debt to equity ratio 2000-2005 however increased in 2006 when it issued 9 billion in Notes in 2006 to repurchase its common stock and payment of commercial paper due

2005 1.2 1.3 1.7

2006 1.4 1.3 1.7

Home Depot Lowes Industry

2000 9.3 32.9 24.1

2001 6.5 35.9 23.4

2002 6.3 31 26.5

2003 3.7 26.5 25

2004 8.2 21 24.6

2005 9 19.7 23.4

2006 31.7 21.6 23.1

Financial Leverage Increased financial leverage since 2006 due to commercial debt incurred mainly to re-purchased common stock and store expansion 2000 1.4 2.1 2.3 2001 1.5 2.1 2.3 2002 1.5 1.9 2.4 2003 1.5 1.8 2.5 2004 1.6 1.8 2.8 2005 1.7 1.7 2.6 2006 2.1 1.8 2.6

Home Depot Lowes Industry

EXTERNAL ENVIRONMENTAL PESTEL Economic Environment One of the favourable external factor for Home Depot is the economy especially of America, Canada and China. Home is considered one of the asset and protection for an individual and people invest in property Home improvement industry as categorized as recession-proof products Social Environment Ageing group of people are less likely to purchase new homes. Instead they would renovate their homes DIY web sites on the net attitude / culture change Change of preference from Do it Yourself (DIY) to Do it For Myself (DIFM) / Buy It Yourself (BIY) and professionals. Technological Forces A business normally goes online to change the way customers do business with them and see the benefits of the internet, as a new era in running its business. Home Depot has successfully integrated EDI (Electronic Data Interchange) with vendors to have an excellent maintenance of warehouse and inventory. Home Depot also uses a code called UPC. Political/Legal Environment

The philosophy or the political-legal framework of a country affects the business activities and practices Home Depot started its operations to Mexico, Canada, Puerto Rico, Guam, Virgin Islands and China. Home Depot was a success in Mexico and Canada but not in Chile. Global Environment Till date America is holding the position of being the largest market for DIY home products. Worldwide demand for home improvement products will grow as housing development activity is in the rise. Able to gain stronger sales and higher profits Home Depot is able to become a leader Provides employment to host countries KEY SUCCESS FACTOR Extensive product selection 40,000 to 50,000 product available in store 250,000 product available upon special order Exceptional customer service Well trained employee Warehousing capabilities Competitive pricing Convenient locations Excellent management Stay focus Retail store business

Core Competencies Tangible Stores (Pleasant and customer friendly environment) Information Technologies (Online supplier center for warehouse management, purchase and supplier rating) Rapid Expansion (Become the worlds largest retailer in home improvement industry) Financial Pricing (Low price than competitor) Product range (Wide range of product and brand, Variety in design and colors, Sell proprietary items, Sell own brand product) Buying power Quality assurance program

 Environment, health and safety (Safe environment for customer and employees, Committed to protect the environment) Fuel center (Additional service to customer) Intangible Customer service Customer perception (Easy to reach, Can find all the product they need, Cheapest and unique) Intellectual property (Trade mark the name Home Depot, Applies for copy right) Supplier relationship Innovation in inventory & warehousing procedure Human resource policy (Structure way for new recruiting, Continues training program, No commission on sale) Organization structure (multidivisional) Succession planning (Promote from within the company)

Value Chain Primer Activities Inbound logistics Computerized and integrated warehousing, inventory control and purchase order. Operation Integrated information exchange. Convenient store location to reach more customer Pleasant shopping environment Outbound logistic Point of sale bar code scanning, electronic data interchange with vendors, regional buying linked to the corporate communications network, and satellite communications for both data and video transmission Transportation service Marketing & Sales Online sales: web site and e-commerce. Recognize brand Service Professional advice in selecting and using the product Installation service Email newsletter containing advice and announcement of events at their local stores

Support Activities

Firm Infrastructure Web based infrastructure Online supplier center Human Resource Management Structure way of recruiting Continuous training program Succession planning Technology Development Quality assurance program Supplier assessment Improve store environment to increase customer comfort New product development Procurement Internet enable demand planning Online supplier center

Strategy Recommendation

Competitive Advantage Cost Competitive Scope Broad target Cost Leadership Uniqueness Differentiation

Integrated !
Narrow target Focused Cost Leadership Focused Differentiation

Low cost & unique products serve as the vertebra or the brand for Home Depot. Customers require special household products with low cost. Specific buyers needs push Home Depot to create different product line segments.

Competitive Advantage Variety of products with lower cost.

Famous brand. Clear positioning through its differentiation. Focus on the core competencies.

Market Dominance Acquire suppliers. Change management to make clear and sustain corporate culture which serves as the competitive advantage.

De-Layering Promote and enhance innovations. Deepen passion towards job and improve efficiency and skills level-up.

International Strategy Increased market size Largest home improvement retailer in the targeted countries. Economies of scale & learning Expanding market size helps to achieve economies of scale in marketing and distribution. Location advantages o Target for those developing countries where constructions are mushrooming. o Target for those developed countries where home improvement DIY concept is very strong.

Feminine DIY products : - Cater for female customers - Products which are lighter, easily held by smaller palms.

One-Stop shopping store : - Child-care - Snacks and beverages shop - Home improvement consultation services Expand product line : - Renewable energy products - Insects / pests prevention products

Reduce contractors expenses : - Hire cheaper contractors working in the Middle East who are not so wellknown but experienced.