Home Depot Financial Analysis

Home Depot: Updated Financial Analysis Through April 2009

http://seekingalpha.com/article/141909-home-depot-updated-financial-analysis-through-april-2009

The Home Depot, Inc. (NYSE: HD) is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products. The company operates over 2200 "warehouse-style" stores.

We have already posted an initial analysis of Home Depot's financial results, which included earnings of $0.30 per share, for the three months that ended 3 May 2009. This period was the first quarter of the company's fiscal 2009.

Home Depot has now filed a 10-Q quarterly report with a complete set of financial statements, and we used the data in the 10-Q to update our evaluation and scores.

This post reports on the update.

Over the last year, in response to the weak retailing environment and the depressed housing market, Home Depot has taken substantial steps to consolidate operations and reduce capital outlays. The first step was to terminate plans to open about 50 planned stores in the U.S. and to close 15 existing stores. The second step was to exit the EXPO Design Center and a few other peripheral businesses. These actions led to asset impairment, severance, and other charges over $1.1 billion.

The company is also working to reduce inventory costs by streamlining distribution of products to stores. The key element of this strategy is regional Rapid Deployment Centers -- the sixth opened recently -- that receive mass deliveries from manufacturers and dole out the products to 100 or so area stores. This distribution model is similar in form to Wal-Mart's (WMT) exemplar of efficiency.

The 10-Q did not change our evaluation of the quarter's Income Statement, including the comparison with our previously announced expectations. (Click here to see our normalized depiction of Home Depot's Income Statements for the last nine quarters. Please note that our presentation, which we use for all analyses, can and often does differ in material respects from company-used formats.)

Although the 10-Q included some additional Balance Sheet items, these details did not alter our analysis in any material way. However, the newly disclosed Cash Flow from Operations was substantially higher than our estimate. At $1.7 billion, CFO was down 18 percent from its value in the first quarter of 2008. We had mistakenly estimated that CFO would fall closer to 50 percent, to about $1 billion.

When the Cash Flow data was factored into the analysis, the Profitability gauge increased one point and the double-weighted, contrarian Value gauge rose two points, compared to the scores reported in the preliminary analysis. The Overall gauge, thus, turned out to be 5 points higher than our original estimate. The following is a list of the updated gauge scores:

* Cash Management: 7 of 25 (up from 5 in January)

* Growth: 0 of 25 (down from 1)

* Profitability: 8 of 25 (unchanged)

* Value: 8 of 25 (down from 12)

* Overall: 28 of 100 (down from 34)

A handful of the financial metrics we estimated earlier did need to be adjusted to reflect the Cash Flow data in the 10-Q. We also made one unrelated adjustment to our handling of the special charges. For completeness, we repeat the tables below with revised figures highlighted in bold.

Cash Management

April 2009 3 months prior 12 months prior

Current Ratio

1.2 1.2 1.2

LTD/Equity

53.7% 54.4% 64.0%

Debt/CFO

2.2 years 2.1 years 2.2 years

Inventory/CGS

95.1 days 86.4 days 97.0 days

Finished Goods/Inventory

N/A N/A N/A

Days of Sales Outstanding (DSO)

7.5 days 5.7 days 12.1 days

Working Capital/Invested Capital

10.2% 7.7% 7.6%

Cash Conversion Cycle Time

42.7 days 50.5 days 43.9 days

Gauge Score (0 to 25) 7 5 7

Better-than-estimated