EFFICIENT MARKET THEORY
...arket index. (After taxes, only one in seven)." Home Depot : Annual Report Analysis Basic Company and Industry Information Bernie Marcus and Author Blank founded Home Depot in Georgia in 1978. The first few stores were attached to Treasure Island stores and stocked around 25,000 products. What started out as a small neighborhood hardware store soon sprouted as the largest home improvement store in the nation. It wasn’t before long that Home Depot (HD) shares were being traded publicly on the New York Stock Exchange. Today, Home Depot is a member of the Dow Jones Industrial Average and is one of the “Top Ten Most Admired Companies” by Fortune magazine, which also ranked The Home Depot as “America’s Most Admired Specialty Retailer” for the seventh consecutive year. This company only goes up with increasing net sales and net profit. The main ingredient to Home Depot’s success is not only the number of stores there are, but the diverse types of customers they attract. Home Depot attracts contractors, other retail stores, the do it yourselfer, and the average John Doe shopper. Home Depot is also attracting more and more women by increasing and expanding their EXPO Design stores which focuses on wall paper and other types of remodeling. So, whether you’re a contractor looking for lumber to build a house or John Doe who just broke his door handle and is looking to buy a new one, the Home Depot is your one stop superstore. What makes the Home Depot such a pleasant place to shop is the 201,000 friendly and knowledgeable sales associates. Home Depot forces their employees through a rigorous training program to ensure that which ever department they work in, they know the products they’re selling and have the customer service skills to sell it. Home Depot offers their employee’s stock options and 401(k) retirement plans. On the whole, this is just a few of the many reasons why Home Depot has such a low turnover rate on the average when being compared to other large retail chains. Even though Home Depot is the world’s largest home improvement retailer, they are still less than 10 % of the total home improvement and other housing and building related product markets in North America. This has led Home Depot to expand rapidly not only in the United States, but overseas as well. There are Home Depot’s in Canada, Chile, and Puerto Rico. One of their primary goals at the moment is to penetrate into the Latin American market. During fiscal 1999, the Home Depot opened 169 new stores; one every 52 hours. Their goal is to have 1,900 stores by the end of fiscal year 2003. Home Depot also has increased their market by starting EXPO Design Centers and Villager’s Hardware. EXPO is a showroom environment focused on remodeling and decorating projects. Villager’s Hardware is designed to attract customers who simply want the convenience of shopping at a small store when undertaking a small repair. Home Depot plans on expanding both of these stores. Another market Home Depot has just started to get into and is expanding is the Internet. They are planning to have an online superstore. As you can see, Home Depot is a very large successful company. In fact, they more than double their closest competitor Lowe’s in net sales and well surpass them in net profits. The overall industry looks good going into the future. With the population increasing, more and more homes will be built. In conclusion, with housing prices increasing while supply and demand both increases only means positive benefits to the home stores. MD&A Reviewed Home Depot appears to be doing great by expanding their market and product line. Their net sales and profits continue to increase substantially at an annual basis while continuing to hold a firm lead on the market from their closest competitor, Lowe’s. Home Depot shareholders are content with the companies prosper with dividends increasing every year while the market value of Home Depot’s stock only continues to increase. Home Depot is financially stable with positive cash inflow from operating and financing activities with negative cash flows from investing activities, which shows that they’re borrowing money and reinvesting it into the company for expansion. Home Depot achieved all of their goals; exceeding most of them, regarding net sales, earnings, and stock price. As a result, they strengthened their competitive position in the home improvement industry and solidly positioned the company for long-term success. The strength in sales was due mainly to new products and services. Home Depot stores are planning to open at a steady rate of 21-22%. With the new Home Depot University, where 50,000 customers improve their do-it-yourself skills over a 4-week program, premiered in all stores. Home Depot is exploring e-commerce and at the same time launching new ventures, such as a EXPO and Villager’s Hardware. Financing Activities With Home Depot’s success, they are planning on expanding stores at an alarming rate across the United States and around the world. They way they are doing this is by increasing their liability to banks and increasing their stockholders equity. Home Depot does not use financial leverage, which allows them to incur less risk. As you can see, Home Depot is very liquid in that they have well than enough money to pay off their debt. Keep in mind however, Home Depot uses estimates and assumptions to report everything. Therefore, the company use of financing might not be accurate. Investing Activities As stated earlier, Home Depot is increasing at a rapid rate. This is leading to the purchasing of new and more equipment, buildings, and land. Therefore, their cash inflow from investing activities is negative. As you can see, the Home Depot is investing a lot of money in expansion. Fiscal year ended February 3, 2002 compared to January 28, 2001. Fiscal year 2001 consisted of 53 weeks as opposed to 52 weeks in 2001. Net sales for 2001 increased 17.1% to 53.6 billion from 45.7 billion in 2000. This increase was mostly due to the following: the 204 new stores opened during fiscal year 2001and full year sales from the 204 stores opened in 2000. About $880 million increase in sales was attributed to additional week in 2001. Gross profit as a percentage of sales was 30.2% for 2001 compared to 29.9% in 2000. The rate increase was primarily due to a lower cost of merchandise resulting from product line reviews and increase in the number tool rental centers from 342 at the end of 2000 to 466 at the end of 2001. They expect to have tool rental centers in approximately 600 store by year end 2002. Operating expenses as a percent of sales increased to 20.9% from 20.7% fiscal 2000. Selling and store operating expenses as percent of sales increased to 19.0% in 2001 from 18.6% in 2000. The increase was primarily due to the growth in store occupancy costs resulting from higher depreciation and property taxes due to their investment in new stores, combined with increased energy costs. Also credit card transaction fees were higher than prior year due to increased penetration of total credit sales. These increases were partially offset by a decrease in store payroll expense caused by an improvement in labor productivity resulting from initiatives inside the store and new systems enhancements. Store initiatives include their Service Performance Improvement (SPI) which was implemented in every home depot store in fiscal 2001. Under SPI stores receive and handle inventory at night, allowing associates to spend more time with customers during peek selling hours. Pre-opening expenses as a percent of sales were 0.2% for fiscal 2001 and 0.3% for fiscal 2000. Pre-opening expenses averaged $569,000 per store in fiscal 2001 as opposed to $671,000 per store in 2000. The decrease in the average expense per store was primarily due to shorter pre-opening periods as they reengineered their store opening process. General and Admin expenses as % of sales were 1.7% for fiscal 2001 compared to 1.8% in fiscal 2000. This decrease was primarily due to cost savings associated with the reorganization of certain components of their general and administrative structure, such as the centralization of their merchandising organization, and their focus on expense control in areas such as travel. Interest and Investment Income as a percent of sales was 0.1% for both fiscal 2001 and 2000. Their combined federal and state effective income tax rate decreased to 38.6% for fiscal 2001 from 38.8% for fiscal 2000. The decrease in fiscal 2001 was attributed to higher tax credits and lower effective state income tax rate compared to fiscal 2000. Net Earnings as a percent of sales were 5.7% for fiscal 2001 compared to 5.6% for fiscal 2000, reflecting the increased gross profit rate, which was partially offset by higher store operating expenses, as described above. Diluted earnings per share were $1.29 for 2001 compared to $1.10 for 2000. Cash used in financing in fiscal 2001 was $173 million compared with cash provided by financing activities of $737 million in fiscal 2000. the increase in cash used was primarily to the net effect of repaying $754 million of commercial paper and issuing $500 million of 5.375% Senior Notes during fiscal 2001. They also have a commercial paper program that allows them to borrow up to $1 billion. As of February 3, 2002, there were no borrowing outstanding under the program. In connection with the program, they have a back-up credit facility with a consortium of banks for up to $800 million. The credit facility, which expires in 2004, contains various restrictive covenants, none of which are expected to impact their liquidity of capital resources. They use capital, operating and other off-balance sheet leases to finance about 20% of their real estate. Off-balance sheet leases include three leases created under structured financing arrangements to fund the construction of certain stores, office building and distribution centers. Two of these lease agreements involve a Special Purpose Entity which meets the criteria established by GAAP and is not owned or affiliated with the Company or its management. Full Disclosure Issues at Home Depot Full disclosure is a powerful incentive for companies to achieve their equal opportunity objectives. Equal employment opportunity is a key issue for many shareholders. The 1995 bipartisan Glass Ceiling Commission Study explains that a positive diversity record has a positive impact on the bottom line. Yet while women and minorities comprise 57% of the U.S. workforce, the Commission found that they represent only 3% of executive management positions. Workplace discrimination has created a significant burden for shareholders due to the high cost of litigation, potential loss of government contracts, and the financial consequences of a damaged corporate image resulting from discrimination allegations. In several instances, including at Home Depot, the financial impact on shareholders has exceeded $100 million to settle discrimination lawsuits. More than 150 major U.S...