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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 ( Lowe’s and Home Depot) for their hardware and lumberyard requirements because with these companies one does less running around. Lowe’s (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 world’s 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.

Lowe’s Inc. Lowe’s Companies, Inc. and subsidiaries (Lowe’s established in 1952) is the world’s second largest home improvement retailer. They operate 1,754 stores, comprised of 1,715 stores across 50 U.S. states,

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Home Depot Vs Lowe 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 Lowe’s 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).

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Home Depot Vs Lowe

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 Lowe’s 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 Lowe’s 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 Depot’s 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

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Home Depot Vs Lowe 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

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Home Depot Vs Lowe 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 Shareholder’s Equity  While HD maintained a steady growth in ROE, Lowe's ROE remain flat  Compared to Lowe's, HD’s 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 Notes & Observations: 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.

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Home Depot Vs Lowe

Return on Assets (ROA) Notes & Observations: 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 Notes & Observations: Current Ratio= Current assets ÷ Current Liabilities  Indicates a company’s 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 Notes & Observations:  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

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Home Depot Vs Lowe

Debtor Turnover Notes & Observations: Debtor turnover ratio= Sales ÷ avg debtors  HD has a steady decline in Debtor turnover ratio which is good.  The majority of the Lowes s 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 s receivable originated by the Company and services these s. Hence no AR reported in the balance sheet *[source Lowes annual Report]

Debt Collection Period Notes & Observations:

 Debtor collection Period= 360 ÷ debtor turnover  This data could not be compared since debtors for Lowes has been sold to GE capital

Inventory Turnover Notes & Observations: 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.

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Home Depot Vs Lowe

Debt to Equity Ratio Notes & Observations:

 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 Notes & Observations: 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 Lowe’s. 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

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Home Depot Vs Lowe share repurchase plan and sold its HD Supply business. Lowe’s 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) 2) 3) 4) 5) 6) 7) 8)

The Home Depot Annual Reports The Lowe’s Group Annual Reports http://www.stock-analysis-on.net/NYSE/Company/Home-Depot-Inc/Ratios/ http://www.investopedia.com/university/ratios/operating-performance/ratio3.asp http://www.forbes.com/ http://investorplace.com/2012/08/home-depot-vs-lowes-its-no-contest/ Prof. Srinivasa Rangan, Professor @IIM Bangalore Ratio Analysis Reference from “Financial ing: A Managerial Perspective 4th Edition”

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Home Depot Vs Lowe

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

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Home Depot Vs Lowe

Appendix 2 Some other Key Ratios on HD and Lowes Figure 2.1: Net Operating Profit Margin

Figure 2.2: Leverage Measure

Net Operating Profit Margin= Net Operating Leverage Measure= Avg Total Assets ÷ Avg share holders equity profit ÷ Sales

Figure 2.3: Inventory Holding Period (days) Inventory Holding Period= 360/Inventory Turnover

Figure 2.4: Operating Cycle ( Days) Ops Cycle= Debt collection period+ Inventory Holding period

HD has healthy Inventory holding period compared Shorter is better – however this need not be true to Lowes in all cases

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Home Depot Vs Lowe

Appendix 3 Facts & Figures: HD & Lowe Ratio Analysis Summary Year Return on Equity (ROE) Return on Sales or Profit Margin Asset Turnover Return on Assets Leverage – Measure 1 Net Operating Profit Margin Net Operating Asset Turnover Return on Net Operating Assets Earnings per Share Debt to Equity Ratio Interest Coverage Current Ratio Quick Ratio Debtor Turnover Debt Collection Period Inventory Turnover Inventory Holding Period Operating Cycle

Profit & Loss : PL Statement Data Date Revenue – Total Cost of Goods Sold Gross Profit (Loss) Research and Development Expense Selling, General and istrative Expense Depreciation and Amortization Operating Income After Depreciation

HD 2013 25.4% 6.1% 183% 11.1% 230% 10.5% 19.88 2.09 3.03 1.31 12.42 1.34 0.41 56.63 6 4.6 79 85

2013 74754 48912 25842

HD 2012 21.1% 5.5% 175% 9.6% 220% 9.5% 12.83 1.21 2.49 1.26 10.96 1.55 0.45 60.42 6 4.5 81 87

HD 2011 17.4% 4.9% 168% 8.2% 210% 8.6% 10.11 0.87 2.03 1.12 10.99 1.33 0.28 66.37 5 4.2 86 91

HOME DEPOT INC 2012 2011 70395 67997 46133 44693 24262 23304

Lowe 2013 12.9% 3.9% 153% 5.9% 215% 7.0% 8.81 0.62 1.70 1.36 7.78 1.27 0.15 No data No data 3.9 93 95

Lowe 2012 10.6% 3.7% 149% 5.5% 194% 6.5% 6.46 0.42 1.44 1.03 8.39 1.28 0.22 No Data No data 3.9 92 92

Lowe 2011 10.8% 4.1% 146% 6.0% 181% 7.3% 5.30 0.39 1.43 0.86 10.02 1.40 0.23 No Data No data 3.8 95 93

LOWE'S COMPANIES INC 2013 2012 2011 50521 50208 48815 33194 32858 31663 17327 17350 17152

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16411

16028

15849

12244

12593

12006

1568

1573

1616

1523

1480

1586

7863

6661

5839

3560

3277

3560

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Home Depot Vs Lowe Nonoperating Income (Expense) Income before Taxes Income Taxes - Total Income Before Extraordinary Items Extraordinary Items and Discontinued Operations Net Income (Loss) Interest and Related Expense – Total

Balance Sheet Data Date Cash and Short-Term Investments Receivables - Total Inventories - Total Current Assets - Other - Total Current Assets - Total Property, Plant and Equipment - Total (Net) Intangible Assets - Total Other Long term Assets Assets - Total short term borrowings s Payable - Trade Income Taxes Payable Current Liabilities - Other Total Current Liabilities - Total Long-Term Debt - Total Other Long term Liabilities Liabilities - Total Stockholders Equity Liabilities plus Shareholders Equity

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7886 3351

6677 2794

5857 2519

3600 1641

3299 1460

3586 1576

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1959

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2010

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2010

635

609

533

463

393

358

HOME DEPOT INC 2013 2012 2011

LOWE'S COMPANIES INC 2013 2012 2011

2494

1987

545

666

1300

1123

1395 10710 773 15372

1245 10325 963 14520

1085 10625 1224 13479

0 8600 518 9784

0 8355 417 10072

0 8321 523 9967

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1170 473 41084 1321 5376 22

1120 430 40518 30 4856 23

1187 399 40125 1042 4717 13

0 1405 32666 47 4657 0

0 1517 33559 592 4352 0

0 1643 33699 36 4351 0

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11462 9475 2370 23307 17777

9376 10758 2486 22620 17898

10122 8707 2407 21236 18889

7708 9030 2071 18809 13857

7891 7035 2100 17026 16533

7119 6537 1931 15587 18112

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