Analyzing financial statement - Home Depot vs Lowe's

Résumé du document

Lowe's and Home depot are two of the largest American home improvement retailer. Home depot is the most important home improvement retailer for the 2009 fiscal year in the United States and Lowe's is his main competitor. At a global level Home Depot and Lowe's are the two most important home improvement retailers right before the German corporation OBI

Home depot is a Delaware corporation that was incorporated in 1978, and is currently headquartered in Atlanta, Georgia. Home Depot sales a wide range of building materials, home improvement and lawn and garden products. Home depot retail shops are on average 105,000 square feet with an additional outdoor area of 24,000 square feet. Most of the stores are located in the United States of America but Home Depot is also a global corporation with shops in Puerto Rico, Guam, Canada, China and Mexico.

Lowe's is an American chain of retail shops for home improvement and appliances founded in 1946. The Lowe's company is now serving more than 14 million of customers thanks to more than 1,616 stores throughout the United States and Canada. Lowe's is now ranked as the second largest hardware chain just behind Home Depot.

These two corporations are selling products such as Plumbing, electrical and kitchen appliances, hardware and seasonal materials, paint and flooring furniture, and building materials such as lumber and millwork.

Nowadays these two companies have three different types of customers willing to purchase in their stores:
- DO IT YOURSELF (DIY) customers: these customers usually purchase products for their own home and who will take care of the installation by their self ;
- DO IT FOR ME (DIFM) customers: these customers are home owners who will purchase products to be installed by third parties.

Professional Customers: These customers are professional installers or repairmen that will contract with home owners for a specific project or installation and will look for supply in home improvement shops. These customers due to their frequency of purchasing are very important for companies such as Lowe's and Home Depot who will design special marketing actions to attract them and to develop loyalty (ex: credit programs, dedicated staff…)

A few time ago, home improvement was a growing market, and the importance of the DO IT YOURSELF trend was a real benefit for Home Depot and Lowe's who were recording large sales totals and a good level of profitability (ex: Home Depot net profit margin in 2007 was 7.29%). But nowadays external factors have decreased these performances and Home Depot and Lowe's are suffering from the economic turndown.

Extraits

[...] The asset turnover ratio shows the total revenue for each dollar of assets the company owns. Lowe's generates revenue of 1.476 for each dollar of assets in 2008. This ratio is high for the company and shows the good use of assets by the management. The debt to equity ratio indicates what proportion of debt and equity a company is using to finance its ratio. Lowe's in 2008 has a 1.810 ratio showing that the company uses 1.810 times more debt than equity to finance its assets. [...]

[...] In addition to this, it must be said that the investments have been slow downed and that the investment income has decreased by 75%. The balance sheets gives to an investor a vision of what a company owns and owes, thanks to this balance sheet we can see that the current assets, that can be easily converted to cash, and can be useful for a company in order to make rapid payments are decreasing by compared to the previous year, despite of the higher level of cash. [...]

[...] This shows that the company revenues in financing activities increased. The inventory turnover is a ratio used to see how many times a year a company sells its average level of inventory. Concerning Home Depot, in 2008, the company sells its average level of inventory 4.432 times. This ratio is pretty high and shows that the company has a good level of inventory, not too low in order to avoid to run short of stocks and not too high in order to avoid high inventories expenditure. [...]

[...] These ratios show the debt level of a company. The debt to equity ratio indicates what proportion of debt and equity a company is using to finance its ratio. Home Depot in 2008 has a 2.316 ratio showing that the company uses 2.316 times more debt than equity to finance its assets. In the 5 previous years these ratios have been continually growing showing that Home Depot uses more and more debt. The times interest earned shows how many times the operating income can cover the interest expense. [...]

[...] The company has a sufficient income to cover the interests of its debt. The return on equity shows how much income is earned for every dollar invested by common stockholders. Home Depot in 2008 earns 12.713 $ for each dollar invested by common stockholders. This ratio was higher during the previous with a top level in 2007 ( 23.026 This decrease is explained by the drop of the operating income and the economic environment. The net profit margin shows the proportion of net profit on the total of sales. [...]