Accordingto www.corporate.HomeDepot.com, founders Bernie Marcus and Arthur Blank dreamtof starting a retail outlet that would allow “do-it-yourselfers” to find theproducts and knowledge they needed for home projects. After they were firedfrom their jobs at Handy Dan Home Improvement Center in 1978, they met at acoffee shop in Los Angles, and devised the framework for an exciting newventure.
In 1979, Bernie and Arthur opened three stores in Atlanta, Georgiawith 200 employees, and averaging weekly sales of $81,700. InSeptember 1981, The Home Depot stock went public on the New York Stock Exchangeand raised $4.093 million. By 1988,they were included in the S&P 500 stock index. In 1999, The Home Depot was added to the DowJones Industrial Average. Today, The Home Depot has 2,283 store in three countries,approximately 406,000 employees, and $94.6 billion in reported revenue in 2016.
Financial Overview 2016 The Home Depot’s fiscal year beginsnormally in February until the last trading day of January. The fiscal year 2016 ended January 29,2017. The Home Depot had a strong yearoverall in 2016. They have grown salesfor the 7th consecutive year. According to the annual report, their net sales were up in fiscal year2016 at $94.6 billion compared to the previous year of $88.
5 billion, which isan increase of 6.4%. The increase isaccredited to the impact of positive comparable store sales driven by increasedcustomer transactions and average ticket growth (Home Depot, 2017). Gross Profit increased 6.
8% to $32.3 billionfor fiscal 2016 from $30.3 billion for fiscal 2015.
Gross Profit as a percentof Net Sales, or gross profit margin, was 34.2% for both fiscal 2016 and 2015. The Net Earnings as a percent of Net Sales,or net profit margin, was 8.4% which was an increase compared to 7.9% in fiscalyear 2015. Shareholder’s enjoyed an increase onequity in fiscal year 2016.
Dividing thenet earnings of $7,957 million by the total stockholder’s equity of $4,333 millionyields a rate of return on equity of 183.6%. That percentage means that Home Depot generated approximately $1.84 ofprofit for every dollar that management had available to them. Home Depot has increased its Return on Equityfor several years, which such consistency is unusual in the business world. Home Depot is ranked the highest in Return onEquity in the home improvement retail industry. With such consistency of high Return on Equity every year, Home Depotexhibits highly skilled management which translates strength in their business,which is very attractive to investors. Determining liquidity ratios of acompany from their balance sheet can give insight into the ability of companyto meet its short-term obligations as well as determining long-term debt toequity.
When calculating the currentratio of Home Depot, the current assets were divided by the currentliabilities. In fiscal year 2016, thecurrent assets were $17,724 million, and the current liabilities were $14,133,which translated in current ratio of 1.25. It has deteriorated slightly from 2015. Next, the quick ratio is calculated by addingcash, cash equivalents, short-term investments, and current receivablestogether then dividing them by current liabilities (Citadel, 2017). Home Depot has a quick ratio of .32 which wasslightly better in fiscal year 2016 than in 2015 at .33.
Home Depot is appears to be in excellentorder to pay its short-term liabilities compared to the home improvement retailindustry averages. Long-term debt toequity ratio is a method to calculate how much leverage a company has takenon. It is calculated by dividinglong-term debt by common equity.
Infiscal year 2016, Home Depot had a long-term debt to equity ratio of 5.16. This is higher and indicates Home Depot hasobtained more leverage from the year before, which indicates a higher businessrisk, because the company must meet principle and interest payments on itsobligations.About the IndustryHomeDepot belongs to the retail industry.
The retail industry is a sector of the economy thatis comprised of individuals and companies engaged in the selling of finishedproducts to end user consumers (Farfan, 2017). Multi-store retail chains in theU.S.
are both publicly traded on the stock exchange and privately owned. Twothirds of the gross domestic product comes from retail consumption. There are 13 major types of retailingbusinesses, along with the percentage of total sales each generates annually inthe U.S. retail industry, according to the most recent figures released by theU.S.
Census Bureau home improvement and garden dealers make 6% of the retailindustry (Farfan, 2017). Retailers arecomprised of brick-and-mortar stores and non-store retailers. Home Depotretails products out of their brick and mortar stores and website. The retailindustry is seasonal with a lot sales occurring over Christmas time. Home Depot’s top five competitors are Lowe’sCompanies, Inc.
, Walmart Inc., Amazon, Best Buy, and Staples. In the home improvement category, Home Depotis the leader with Lowe’s Companies, Inc. following behind as the secondlargest home improvement retail chain in the U.S. market. Home Depot’s net sales in fiscal year 2016were $94,595 million compared to Lowe’s net sales of $59,074. Home Depot’s net earnings for 2016 were$7,957 million compared to Lowe’s net earnings of $2,546 million.
Home Depot is considered the giant in itscategory in the retail industry.Oneof the main is things changing the industry is the use of technology to sellproducts. Many large retailers as well as small retailers are selling productand services via their website. This gives consumers the convenience ofshopping from home and never stepping foot into a brick-and-mortar store. Also,companies are using technology to collect information of customer purchases andinterests so they can better tailor products and services around customerneeds. Retailers are dealing with a moreempowered consumer, and must be able to satisfy consumers with their wants, aswell as delivering as fast as they can.
Stock Ownership Institutional holdings make up 71%of Home Depot stock. The top threeinstitutional holders are Vanguard Group Inc., Blackrock Inc., and CapitalWorld Investors. There are 1,925holders, 829,144,512 total shares held, and the total value of holdings is$166,931,664,601. Insider trade holdings make up 29%of Home Depot stock.
The top threeinsider trader holders are Craig Menear CEO of Home Depot at 231,033 shares,Carol Tome CFO of Home Depot at 197,610 shares, and Timothy Crow Executive VicePresident (retired) of Home Depot at 88,253. The insider trading has primarily been selling in the last three monthswith one buy and four sells. SevenWeek Stock Analysis in 2017 A company’s stock price change isrelated to “supply and demand” of buyers and sellers. When there are more buyers than seller, stockprices will rise. Home Depot isexperiencing a high level of demand. In my opinion, the rise in Home Depotstock in this period is due to the time of the year which is right after HomeDepot’s Black Friday debut and continues through Christmas.
Home Depot continues to see the stock priceincrease through January thus far as they near the end of their fiscal year for2017. Home Depot ended the 3rdquarter 2017 strongly with increase in net sales, net earnings, and return oncommon equity, which can cause increases to stock prices due to its solidfoundation as a company. Unemployment isdown which more people are working and contributing to the retail industry andeconomy as a whole. Recent taxreformation by the government puts more money in the wallets consumers andcorporations. Seven Week Standard & Poor 500Analysis in 2017 Standard & Poor’s (S) isthe world’s leading index provider and the foremost source of independentcredit ratings.
The S&P 500 is a stock market index that tracks the 500most widely held stocks on the New York Stock Exchange or NASDAQ. It seeks torepresent the entire stock market by reflecting the risk and return of alllarge cap companies (Amadeo, 2017). HomeDepot’s S credit rating is “A”, and its S Outlook is stable. The S 500 took a small dip in the sevenweek period, but continues to rise. Theindex should continue into 2018 as the earning growth rate continues.
Home Depot has a beta of 1.02, which means itis theoretically 2% more volatile than the market. The beta of Home Depot does not deviate muchfrom the market rate of 1. When beta ishigher, the stock are considered riskier, but could translates into higher returns.