Value Line Publishing

1. What do the financial ratios in case Exhibit 7 tell you about the operating performance of Home Depot? What additional information do the different ratios provide? Complete and compare a similar analysis for Lowe's using the Excel Template provided - Lowe's Financial Ratios.

The financial ratios in exhibit 7 show Home Depot has an overall profitability given growth in the market compared to sales and liabilities. Home Depot 5 year average ROC was 15.22% showing a positive company profit as a percentage of total company value and ownership. The ROE was 17.52% indicating a positive combined total worth of the company. The average for Lowe's was ROC of 6.95% and a ROE of 14.70%. Using these benchmarks, an investor would want to go with the better average and invest in Home Depot. Home Depot also showed a higher 5 year average gross margin of 30.52% compared to Lowes of 27.59%. The gross margin represents the percent of total sales revenue that the companies retain after incurring direct costs with producing the goods and services sold. The averages here shows that Home Depot retains more on each dollar of sales to other cost obligations which performs stronger than Lowes. The operating margin which indicates how much a company makes (before taxes and interest) on sales is a good indicator of the quality of the company. Home Depot showed an increase from 1997 to 1999 then a decrease and stabilization in 2000 and 2001. Lowes showed a steady increase indicating that Lowes was earning more dollars per sales across the 5 year period and was performing better than Home Depot. The NOPAT margin fluctuated for Home Depot showing changes in the firm operating efficiencies. Lowes showed a steady increase indicating operating efficiencies were improving. Here Lowes shows more strength than Home Depot as they were stronger in improving operating efficiencies.

2. Who deserves the "management of the year" award in the retail-building-supply industry? Provide a detailed explanation including support for your position.

Home Depot demonstrated strong management practices in the industry by properly forecasting market needs and through acquisitions of specialty stores (Georgia lighting, N-E Thing Supply Company, plumbing, and wholesale distributors) they not only expanded their influence in the market they set up a path to provide specialty services. This is important as Home Depot had been seen in the industry as more of a large contractor services company and not the "do it yourself" home improvement provider. Acquiring smaller companies allowed them to absorb those customers and provide a more specialized service offering. This was further demonstrated by Home Depot's "Pro-Stores" initiative where smaller retailers were leveraged to reach out to the average home owner and handy man. Looking at the market trends when Home Depot instituted these practices is important. This was done during a time where the housing market had not quite burst and cost of home ownership was on average very expensive especially for single-income families. As consumers became more hands on with home improvements (and during an increased time of house "flipping") Home Depots decision to expand their service offerings was a good move. With this new strategy, Home Depot also changed their service offerings by branding their chain as more than just industrial contracting. The company imbedded themselves in dense urban areas and provided services that were focused on decorative and design services. According to Home Depots 2002 Annual Report the company invested more than 19 million hours in associate training focusing on these new customer service offerings to facilitate the stores environment in focusing on the average home owner. This is important as these urban areas were likely not focused on home building or extensive repairs, but property improvements to increase the value of home owner's investments During this time, Home Depot also expanded internationally in neighboring countries (Canada and Mexico) where their corporate influence