This document provides an executive summary of Home Depot. It describes Home Depot as the largest home improvement retailer in the US, operating over 2,000 stores. It analyzes Home Depot using Porter's Five Forces model and finds low threat of new entrants due to high costs, and that Home Depot has power over suppliers due to large purchasing volumes. Financial analysis shows improving profitability ratios over 5 years. The conclusion is that Home Depot is performing well in a recovering housing market and economy, and is expected to see revenue growth of around 15-19% over the next 5 years.

1. Executive
Summary
Home Depot
Submitted By:
Usman Riaz

2. Industry & Company Description
Home Depot is a home improvement and construction company. It has its headquarters located in
Georgia, Atlanta. Founded in 1978, Home Depot is the largest home improvement retailer in the United
States with 2248 stores. This includes 1976 stores in US and the rest in Canada, Mexico, China, UK,
Argentina and Chile. Home Depot serves three primary customer groups; do-it-yourself (D-I-Y), do-it-forme (D-I-F-M) and professional customers. The company offers over 300,000 different products. Home
Depot operates in the home improvement and construction industry. The industry consists of other
competitors like Lowe’s in USA which is the main competitor in term of size. Home depot and Lowe’s
together make up only 18% of the total industry and the rest of the market share is distributed amongst
big-box retailers such as Walmart and other small chains and businesses. Home improvement industry is
recovering from a slum caused by the housing market collapse of 2008. The revenues of the industry got
hit severely as the demand for these goods rock bottomed. But the good news is that the housing
market has started a comeback in 2012 and the “Joint center for housing studies of Harvard University”
suggests that the market is on the right path of a recovery. After several years as a drag in economy, the
housing sector contributed positively to the GDP in 2012.
Porter’s Five Forces
Industry Competition
Home Depot sit quite comfortably on the top as the market leader in the industry. Its closest rival
Lowe’s stands far behind. The revenues for the year ending Feb 2013, Home Depot reported revenues of
74,754 Million whereas Lowe’s Revenues were a distant 50,521 Million. Home Depot has a core
competency in store locations throughout the country. Besides this advantage the rivalry is very high.
There are a lot of small retailers who are competing on prices. The market is saturated but the existing
competitors are striving harder and harder to get a step ahead of each other. There are some small
retailers who beat Home Depot on prices but their limited size and after sales services is something that
cannot match Home Depot.
Threat of New Entrant
The threat of new entrant is low because of the high startup cost associated. The large size of Home
Depot purchases gives it a significant buying power that a new entrant or another small competitor
cannot enjoy. It is very hard and risky for a new entrant to come into a market that needs huge upfront
investment and has settled competitors with strong brand identification already. Home Depot has
experience of decades in the industry that makes it an even fiercer competitor for a new entrant.
Suppliers
Home Depot can drive the least prices out of the suppliers due to its huge buying powers. The greater
the power of Home Depot, the lesser will be its supplier’s power to impose high prices. A buyer such as
Home Depot will always dictate the terms when it comes to negotiating prices so the supplier has a low
power in this case
Customers
The bargaining power of the customer is medium because of the presence of other retailers. What puts
Home Depot in a relatively good position despite being on the expensive side is it’s after sales services

3. that the smaller suppliers and even Lowe’s cannot match. Besides it has a strong brand name that is
associated with quality. Home Depot’s presence in all parts of the US makes it a more preferable place
to shop too.
Substitute Products
There is a low threat of substitutes as home improvement and construction products are essentials and
not luxury. These products are necessary for the purpose they are bought.
Financial Statement Analysis
The key ratios have been calculated in the appendix. I will go over them in categories. The current ratio
is improving since the last 5 years with a drop in the last year. The drop still keeps it above 2011.
The liquidity ratios as a whole are getting better as a whole in the last 5 years. Profitability ratios are also
improving significantly with ROE rising from 5.49 in 2009 to 11.04 in 2013. The leverage ratios have not
shown such a good improvement. It has fluctuated up and down in the last 5 years. The times interest
ratio has been improving for the last 5 years. The inventory turnover rate deteriorated from 2008 – 2011
but has started to improve since. Total Asset turnover also decreased in 2010 but has improved since
then. The reason for these two sales and inventory related ratios slum in 2010 was the effects of
recession that hit the housing market in particular. The market Value ratio has been on the rise and
shows the company gaining value in the stock market.
Relating Home Depot’s ratios to the Lowe’s and the overall industry, all the ratios show that Home
Depot is doing better than the its main competitor and the industry as a whole. The graph in the
appendix shows Home Depot’s stock performance vs. Lowe’s. So as a whole the company is doing well in
a recovering economy.
Conclusion
I will use the historical data and analysis based on fundamentals and then I will also look at the charts to
come to a conclusion.
Looking at the recent history, after the recession Home Depot is doing well. The revenues are growing at
an increasing rate but the most impressive thing is that the earning are growing at a better rate than the
revenues. This shows a reduction in expenses and a greater profit margin. The GDP is growing after the
recession is over so it gives Home Depot a favorable macro environment to grow.
The Revenues are rising during the last four years and the appendix shows the percentage rise. At the
moment the economy is getting out of a bad time so it is increasing at a higher rate. I expect the growth
to smoothen in the next 5 years and be around 19%. With Home Depot currently performing better than
its and analyst’s expectations, this number seems to be appropriate.
The DuPont Identity shows that the asset turnover and the profit margins have increased showing that
the expenses have decreased.
I have calculated the growth in earning by using growth rate formula and Gordon growth model. I have
taken the average and it come out to be 10.96%. For a 5 year period I would take this to be around 14%.

4. Mrkt
Value
Inventory
Cove
rage
Leverage
Profitability
Liquidity
Appendix
Ratios
Net working
Capital
Current Ratio
Quick Ratio
Cash Ratio
Gross Margin
Operating Profit
Margin
Profit Margin
ROE
ROA
2013
3910M
2012
5144M
2011
3357M
2010
3537M
2009
2209M
1.34
0.34
0.22
34.57
10.39
1.55
0.34
0.21
34.47
9.46
1.33
0.16
0.05
34.27
8.59
1.34
0.23
0.14
33.87
7.26
1.20
0.13
0.05
33.65
6.11
6.07
25.51
11.04
5.52
21.70
9.58
4.91
17.67
8.32
4.02
13.72
6.51
3.17
12.71
5.49
Debt/Equity
Debt/Capital
Times Interest
Earned
Inventory
Turnover
0.61
0.38
12.43
0.60
0.38
11.01
0.52
0.34
10.95
0.50
0.33
6.95
0.64
0.39
6.67
6.98
6.82
6.40
6.50
6.68
Total Asset
Turnover
P/E Ratio
Market to Book
Ratio
1.82
1.74
1.69
1.62
1.73
22.86
5.83
19.49
4.23
18.15
3.21
20.76
2.85
18.59
2.36

5. DuPont Identity
ROE
2013
2012
2011
2010
2009
25.51
21.71
17.67
13.72
12.71
Net Profit
Margin
6.07
5.52
4.91
4.02
5.68
Asset T.O
Leverage
1.82
1.74
1.69
1.73
1.75
2.31
2.26
2.12
2.11
2.50
Revenue Growth Rate:
year
2011
2012
2013
2014
Revenue
15126000
16014000
18246000
Growth
3.82%
5.87%
13.94%
15%-16%
Growth= (Retained Earningst-1/ NIt-1) * ROE = (20038000/4535000)*0.2551 = 12.71%
CAPM = E (R)=Rf + b(E(Rm) - Rf)
= 2.68+0.62(13.20 – 2.68) = 9.20
Gordon Growth Model = Value= Div/(r-g)
75.51 = (0.29*4)/(9.20-g) = 9.21%
Averaging two rates gives us 10.96%
2018
19%