Case Questions - Home Depot

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1. Evaluate The Home Depot's growth strategy.

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.

Ans:
The company implemented it’s strategy in a very effective way by taking the following
steps/initiatives.
a) The company targeted it’s customers as individuals & small contractors.
b) It offered low and competitive pricing to consumers by keeping the overheads low
and passing the benefits to consumers.
c) Cost is reduced by emphasising on higher volume and lower margins with high
inventory turnover ratio.
d) Efforts made to avoid stock out and customer inconvenience by maintain 25000
stock keeping units.
e) Carefully and diligently choosing the nationally advertised brand as well as lesser
known brands.
f) Merchandising strategy was complimented with excellent sales assistance through
proper training to the sales person about the products and their uses.
g) Good employee retention policy that enabled the sales force to remain with the
company by paying more than their competitors and about 90% of employees were
of full time basis. It increased the level of engagement and involvement.
h) They adopted aggressive advertising program.
i) The company also sponsored in-store-demonstration of DIY techniques and product
use.
j) By expanding the business into new markets by opening more stores.
k) Through all above strategies Home Depot remained ahead of competitors by
blending high services at lower prices.

Analysis of Home Depot’s Financial Performance:

The analysis of financial performance of the company reveals the facts as below.
a) Liquidity Ratios:
Current Ratio:
i) For 1984, it was 147412000(Current assets)/47302000(Current Liabilities) =
3.117
ii) For 1985 it was 190061000(Current assets)/83610000(Current Liabilities) =
2.273
Quick Ratio:
i) For 1984, it was 63366000(Quick assets)/47302000(Current Liabilities) =
1.339
ii) For 1985, it was 37361000(Quick assets)/83610000(Current Liabilities) =
0.447

From the ratios it can be inferred that the liquidity position was better in 1984
compared to 1985.

b) Profitability Ratios:
Gross Profit Margin Ratio:
i) For 1984, it was 114,319,000(Gross Profit)/432,779,000(Net Sales) X100% =
26.41 %
ii) For 1985, it was 181,457,000(Gross Profit)/700,729,000(Net Sales) X100% =
25.89 %

Net Profit Margin Ratio:


i) For 1984, it was 14,122,000(Net. Profit)/432,779,000(Net Sales) X100% =
3.26 %
ii) For 1985, it was 8,219,000(Net. Profit)/700,729,000(Net Sales) X100% = 1.17
%

Return on Investment (ROI):

iii) For 1984, it was 26,252,000(EBIT)/249,364,000(Total Assets) X100% = 10.52


%
iv) For 1985, it was 11,619,000(EBIT)/380,193,000(Total Assets) X100% = 3.05 %

From the analysis, it may be inferred that though sales of the company has increased
in 1985 compared to 1984, the profit margin has decreased and ROI has reduced.
This may be due to aggressive expansion of the company. The total asset value has
increased in 1985 as compared to 1984, which indicates an expansion.
c) Turn Over Ratios:
Inventory Turn Over Ratio:
i) For 1984, it was 432,779,000 (Net. Sales)/ 84,046,000 (inventory) = 5.14
ii) For 1985, it was 700,729,000 (Net. Sales)/ 152,700,000 (inventory) = 4.58

This indicates that some of the new stores might have been performing poor which
has increased inventory turnover in 1985. But, stock out position is safe in 1985.
Total Asset Turn Over Ratio:
i) For 1984, it was 432,779,000 (Net. Sales)/ 249,364,000 (Total Assets)
= 1.73
ii) For 1985, it was 700,729,000 (Net. Sales)/ 380,193,000 (Total Assets)
= 1.84

The ratio indicates that the investments are well thought of and promising.

Average Collection Period:


i) For 1984, it was 9,365,000 (Receivables)/ 1,185,695 (Sales/day) = 7.89
ii) For 1985, it was 21,505,000 (Receivables)/1,919,805 (Sales/day) =
11.20

Comparison with M/s Hechinger’s

a) Gross profit margin ratio is better for M/s Heichinger’s (30.10% and 29.30%)
compared to Home depot (26.41% and 25.89%). However the rate of fall in the
profitability is more for M/s Heichinger’s during 1984 and 1985.
b) Average Collection period is better for Home Depot which may give an added
advantage for working capital management.
c) Operating cost/sales % for Home depot was better in 1984 ( 20.60% compared to
M/s Heichinger’s (21.10%)). But, in 1985 the operating cost/Sales % of Home Depot
was more (23.18%) than M/s heichinger’s (21.60%). It might have happened due to
opening new stores and under stabilisation.

d) Store Productivity:
No of customer transactions have been increased in 1985 compared to 1984, which
provides a +ve signal. However, due to opening of new stores, avg. transaction per
sale has decreased in 1985 compared to 1984. Inventory turnover has increased in
1985 which gives a –ve signal. This may be due to opening of new stores. Opearting
cost/sales has increased to 23.18% in 1985 compared to 20.60% in 1984, which
indicates declination of productivity.
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 enhance Operating Performance:

a) Providing excellent customer service.


b) Providing more training to sales people.
c) Implementation of Latest software and technologies for MIS.
d) Adhering to strict and efficient merchandising strategy.

Growth Strategy:

a) Company should open multiple stores in the existing market.


b) Enter into new markets with aggressive yet effective advertising.
c) Company may start it’s own logistics & transportation like Amazon in long run.
d) Thoughtful acquisitions.
e) Apt use of mobile through apps.

External Financing Needs:

a) Go for long term loans from consortium of banks.


b) May raise funds by disposing the assets which are non performing.
c) Leasing out properties, which may increase operational cost but definitely have a
less burden on capital requirement.

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