Home Depot Case

Group 2
YLDP
23 July 2019
1. Evaluate The Home Depot's growth strategy.
How well did the company implement its strategy? Analyse The Home Depot’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.

 Home Depot’s Business Strategy

 Focused on DIY segment of market
 Keep costs low through low overheads, purchase discounts, and high inventory
turnover.
 Attraction customers through aggressive advertising and competitive pricing.
 Suburban based large warehouse styled stores to reduce cost and reduce stock
out situations
 Providing high quality products, service to customers developing a loyal
customer base.
 Home Depot implemented this strategy well, this can be seen from the way it
grew in the initial years.
Evaluate 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)

60
86 20
85
85
84 15 40 50
15 83
83
10
82 11 31
81 20 81
7 5
80 5 19
2 8 10
79 0 0 79
1 2 3 4 5
Evaluate Home Depot’s Business Strategy?

 Dramatic increase in profitability in 1986 and 1987

- Company Stock
price - Debt to Equity
 1986/2/3:
13.125  1985 : 2.70
 1987/2/2 :  1987 : 0.91
22.375
Increase of Decrease of
70% 65%

 Home depot took steps to reduce operating costs which let to an increase in profitability without
sacrificing growth.

 Markets rewarded these developments, enabling the company to issue equity and reduce debt.
 Home Depot vs Hechinger’s
Profitability 1986 1985 1984
Net profit Margin Home Depot 1.2% 3.3% 4.0%
Hechinger’s 4.8% 5.2% 5.3%
Return on Equity Home Depot(2.2%) 9.2% 17.6% 15.7%
Hechinger’s(7.1%) 15.8% 18.9% 19.1%
Asset Management Home Depot 1.84 1.74 2.43
Total Asset Turnover Hechinger’s 1.48 1.72 2.02
Debt Management Home Depot 4.27 3.11 1.61
Financial Leverage Hechinger’s 2.21 2.12 1.79
1- Payout Ratio Home Depot 1 1 1
Hechinger’s 0.93 0.95 0.95
Sustainable Growth Rate Home Depot 9.2% 17.6% 15.7%
Hechinger’s 14.7% 18.0% 18.1%
Financial Comparison:
37.6%
-42%

51%
-13%

Comparing to 1984, 85, 86 FY Company has degrown by -42% in earnings and -13% on Working
capital in 1986 wrt to the previous year
 10.4% 29%

31%
13%

Comparatively Hechinger is smaller than Home Depot However their

Earnings were in incremental side as described above
2. Evaluate The Home Depot's growth strategy.
Recommend a plan of action to The Home Depot's management based on your analysis of the company's current
performance and future growth plans. Your recommendations should deal with the company's operating performance,
growth strategy, and external financing needs.
 To improve operating performance
 There are two steps that the company can do to improve operating performance.
 To sell and lease back some of the Home Depot’s fixed assets. This is more beneficial than the
company’s method of buying all properties. This will help the company implement expansion strategy
will less cash
 Go slow in expansion. The company opened only 10 stores in 1986. This will help the company utilize
they cash flows for most of the expansion.
 Also they should focus on stabilizing already opened stores
The Home Depot’s financing needed for Expansion
Construct Stores Capital needed Lease Back stores Capital needed

Acquire sites & Construction $6,600,000 Leasing $1,700,000

Inventories
Inventories $1,800,000 $1,800,000

Total per Store

Total per Store $8,400,000 $3,500,000

Total for 9 new

Total for 9 new stores $75,600,000 stores $31,500,000
 To issue equity
 As February 1986,the company’s stock price was $ 13.125
 To raise $ 59.4 M,the company has to issue approximately 4.5 M new shares, severely diluting the ownership
interests of current shareholders
 Hence the company should first stabilize operations and focus on increasing the share price. Once this is
done, the company can raise equity from the market by diluting lesser stake.
Thank You.