Home depot case study Sogang MBA

1. HOME DEPOT
Case Study
M62402 성낙준 M63415 탁지흔 M62405 이기훈
M62410 최은아 M61402 김승현

2. Contents >
Home Depot
Overview
Question 1
Question 2
Question 3
Question 4
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3. The Home Depot Overview 1/2
1978 The Home Depot Founded 1978
Market :
Do it yourself (DIY) market selling a large
selection of building materials and home
improvement products
3 stores opened in Atlanta
1979 And grew rapidly in the “sunbelt” geography
$ 7million Sales
1981 The Home Depot went public 1981
Case Initially traded over the counter
Date
1984 Listed on NYSE (HD) in 1984
1985
Present The world’s largest home improvement retailer
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4. The Home Depot Overview 2/2
Sales
Sales $700M
$700M
Assets
Assets $380.2M
$380.2M
Earnings
Earnings $8.2M
$8.2M
1985 Customers
Customers 23.3M
23.3M
Market served
Market served 15
15
Stores
Stores 50
50
Employees
Employees 5,400
5,400
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5. Question 1 >
Home Depot
Overview
Question 1 Evaluate Home Depot’s business
Question 2
strategy.
Do you think it is a viable
Question 3
strategy in the long run?
Question 4
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6. Question 1 >
What is Home Depot’s Business Strategy?
Home Depot’s Business Strategy
– Focused on DIY segment of market
– Keep costs low through low overhead, purchase discounts, and
high inventory turns
– Attracting customers through aggressive advertising and
competitive pricing
– Providing high quality service to customers
“The home Depot is the only company that has successfully
brought off the union of low prices and high service”
-Fortune-
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7. Question 1 >
What is Home Depot’s Business Strategy?
Home Depot’s Business Strategy
– Aggressive market expansion
– During 1985 the company implemented its most ambitious
expansion plan to date by adding 20 new stores on eight new
market
[Number of Markets] [Number of Stores]
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8. Question 1 >
What is Home Depot’s Business Strategy?
Do you think it is a viable strategy in the long run?
Short run Long run
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9. Question 1 >
What is Home Depot’s Business Strategy?
Dramatic increase in profitability in 1986 and 1987
– Company Stock price – Debt to Equity
1986/2/3 :: 13.125
1986/2/3 13.125 1985 :: 2.7
1985 2.7
1987/2/2 :: 22.375
1987/2/2 22.375 1987 :: 0.91
1987 0.91
– Increase of 70% – Decrease of 65%
• Home depot took steps to reduce operating costs which led to an
increase in profitability without sacrificing growth.
• Markets rewarded these developments, enabling the company to
issue equity and reduce debt.
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10. Question 2 >
Home Depot
Overview
Analyze Home Depot’s financial
Question 1 performance during the fiscal years
Question 2 1983-1985.
Compare Home Depot’s performance in
Question 3
this period with Hechinger’s
Question 4 performance.
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11. Question 2 >
Ratio Analysis
Home Depot vs Hechinger’s
Profitability 1986 1985 1984
Home Depot 1.2% 3.3% 4.0%
Net Profit Margin
Hechinger 4.8% 5.2% 5.3%
Home Depot (2.2%) 9.2% 17.6% 15.7%
Return on Equity (ROA)
Hechinger (7.1%) 15.8% 18.9% 19.1%
Asset Management
Total Asset Turnover Home Depot 1.84 1.74 2.43
Hechinger 1.48 1.72 2.02
Debt Management
Home Depot 4.27 3.11 1.61
Financial Leverage
Hechinger 2.21 2.12 1.79
Home Depot 1 1 1
1 - Payout Ratio
Hechinger 0.93 0.95 0.95
Home Depot 9.2% 17.6% 15.7%
Sustainable Growth Rate
Hechinger 14.7% 18.0% 18.1%
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12. Question 2 >
Ratio Analysis
ROE= Net income/equity
ROA=Net income/Sales(ROS) X Sales/Total Asset(Total Asset T/O)
ROE= Net income/Total Asset(ROA) X Total Asset/Equity (Financial Leverage)
Dupont ROE = Net income/Sales X Sales/Total asset X Total Asset/Equity
= ROS X Total Asset Turnover X Financial Leverage
ROE =[ROA + (ROA-i)*D/E]*(1-T)
ROA 가 차입금리 (i) 를 상회하는 한 부채비율이 높을수록 ROE 는 높아짐 .
재무레버리지 효과
ROA 와 차입금리 (I) 의 차이를 크게 하여 ROE 를 높게 만드는 효과
Home depot 의 경우 ROA 가 그 당시 차입금리보다 낮으므로 역레
버리지효과로 재무상태가 악화됨
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13. Question 2 >
Cash Flow Analysis
Emit : 000
Home Depot Inc. Hechinger
1983 1984 1985 1983 1984 1985
Cash Flow From
Operating Activities -10,574 -3,056 -43,120 3,138 19,007 12,190
Investing Activities -16,330 -81,655 -92,026 -16,346 -25,531 -36,037
Financing Activities 40,821 114,605 92,755 25,310 87,901 27,288
Net Change in Cash 13,917 29,894 -42,391 12,642 81,377 3,441
1986/2 재고자산 및 Store 영업비용
– $ 134,354,000( 전년대비 80.5% 증가 )
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14. Question 2 >
Cash Flow Analysis
Cash Flow Analysis
Negative cash flow from operations for all 3 years
– Inventory increases
– Store expansions (property and equipment)
– Most cash provided through Long Term Debt
– Hechinger had positive cash for all 3 years
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15. Question 3 >
Home Depot
Overview
Question 1
How productive were Home
Question 2
Depot’s stores in the fiscal years
Question 3 1983-1985?
Question 4
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16. Question 3 >
Store Productivity
The Home Inc: Store Productivity: 1983-1985
1983 1984 1985
Avg. Net Sales/ Stores(in millions) 17.67 17.31 17.30
Transaction per store(in thousands) 586 572 575
Net Sales/Transactions($) 30 30 30
Net Sales/Square Feet($) 244 228 219
Net Sales/Employee($) 146,400 135,250 149,085
Incremental Sales growth/ new Employee (%) -35.48% 3.53% 73.37%
Net Earnings per Employee($) 5,886 4,406 1,745
Incremental Earnings growth/Employee (%) -0.05% -25.14% -60.40%
Net Earnings/Store(in thousands) 710 564 202
Earnings Growth/new Store (%) 20.62% -20.60% -64.10%
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17. Question 3 >
Store Productivity
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18. Question 4 > Home Depot’s stock price was dropped by 23% between
Home Depot January 1985 and February 1986, making it difficult for
Overview
the company to rely on equity capital to finance its
Question 1 growth.
Covenants on existing debt restrict the magnitude of the
Question 2 company’s future borrowing.
Question 3 Given these constraints, what specific actions should
Home Depot take with respect to its current operations
Question 4 and growth strategy?
How can the company improve its operating
performance?
Should the company change its strategy?
If so, how?
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19. Question 4 >
improve operating performance
To improve operating performance
Option 1
To sell and lease back some of the Home Depot’s fixed
assets
The Home Depot’s financing needed for Expansion
Construct Stores Capital needed Second-use Stores Capital
needed
Acquire sites & construction $6,600,000 Leasing $1,700,000
Inventories $1,800,000 Inventories $1,800,000
Total per store $8,400,000 Total per store $3,500,000
Total for 9 new stores $75,600,000 Total for 9 new stores $31,500,000
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20. Question 4 >
improve operating performance
To improve operating performance
Option 2
To issue equity
– As February 1986, the company’s stock price was $13.125;
– To raise $59.4m, the company has to issue approximately 4.5m
new shares, severely diluting the ownership interests of current
shareholders;
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21. Questions ?
THANKS YOU