Jean C. Rivera-Nazario
CONT-6501
DR. Gonzalez Cerrud
10-mar-2015
THE HOME DEPOT, INC.
- Evaluate The Home Depot's growth strategy.
The Home Depot innovated in the home center industry by bringing a new retailing concept. One of the most important decision was to cut out completely the warehouse costs by designing retailing stores in a warehouse format in which all the inventory was already at store. This format helped The Home Depot to keep Overhead costs low and as a consequence, past these savings to their customers. This practice also led The Home Depot to work with a higher volume, lower margin and higher inventory turnover, a good indicator for retail companies which in turn helped to reduce costs even more. Having the warehouse format also helped them minimize out-of-stock occurrences, which helped them to have a stronger relationship with the customer, to whom they offered guaranteed products, by either the manufacturer or themselves. Customer service was so important for The Home Depot that 90% of their employees were fulltime works with special trainings of technical knowledge to help their customers with home improvement projects, and their advertising program included in-store demonstration of do-it-yourself which helped the Home Depot grow successfully in its early years.
- How well did the company implement its strategy? Analyze The HomeDepot's financial performance and cash flow during the fiscal year 1985. How well did the company perform in 1985 relative to the previous years? How does The Home Depot's performance compare to that of Hechinger? You may use the analysis in Exhibit 3 in the case as a guide to begin your analysis. Also, make sure that you use data on store productivity in your analysis.
The Home Depot implemented its strategy so well that in five years, from 1981 to 1985 its assets grew up by 2149.7% from $16.9 to $380.2 million while the number of stores arose from 8 to 50 in this period. In 1985 the company increased their sales from previous year by 38.2% but the Net Earnings decreased by 41.8% due to the fact that the company decided to invest in the long-term run to increase their market share, jumping from 31 to 50 stores in 1985 and becoming the first national warehouse retailing chain with presence in all the Sunbelt. This decision impacted the short-term profit growth as a consequence of totaling $162,430,000 in Operating Expenses for FY 1985 vs $89,181,000 in FY1984 and $53,346,000 in FY 1983 which diluted the Earnings per common Equivalent share to $.33 from $.56 in FY 1984 and $.41 in $1983. This information can also be seen in the Statement of Changes in Financial Position in which, although in FY 1985 there was an increase in Working Capital of $6,341,000, this number is less than the previous two years, $50,792,000 and 36,417,000, partly offset by - $42,391,000 in cash.
On the other hand, in terms of competition, Hechinger performs better than Home Depots as the Table I shows a comparison of different indicators for both Companies:
Indicator | Company | FY 1985 | FY 1984 | FY 1983 |
Inventory Turnover | The Home Depot | 3.4 | 3.8 | 3.2 |
Hechinger | 4.5 | 4.5 | 4.4 | |
Leverage | The Home Depot | 4.3 | 3.1 | 1.6 |
Hechinger | 2.2 | 2.1 | 1.8 | |
ROE | The Home Depot | 9.2% | 17.6% | 15.7% |
Hechinger | 15.8% | 18.9% | 19.1% |
Table I: The Home Depot and Hechinger Indicators Comparison.
This table shows that Hechinger has a better inventory turnover, better leverage and better ROE. We could assure that Hechinger was more economic stable. But the most important measure to determine the economic reality is the cash flow, and the analysis shows surprising results opposing Table I results. These analysis are shown in Table II.