The Home Depot Growth Strategy

The Home Depot’s strategy had several important elements. The company
offered low and competitive prices, a feature central to the warehouse retailing
concept. The Home Depot’s stores, usually in suburbs, were also the warehouses,
with inventory stacked over merchandise displayed on industrial racks. The
warehouse format of the stores kept the overhead low and allowed the company to
pass the savings to customers. Costs were further reduced by emphasizing higher
volume and lower margins with a high inventory turnover. While offering low
prices, The Home Depot was careful not to sacrifice the depth of merchandise and
the quality of products offered for sale.

The Home Depot’s financial performance during the fiscal year 1985.

Net sales in fiscal year 1985 increased 62% from $432,779,000 to

$700,729,000. The growth is attributable to several factors. First, the Company
opened 20 new stores during 1985 and closed one store. Second, second-year sales
increases were realized from the three new stores opened in 1984 and from the
nine former Bowater Home Center stores acquired during 1984. Third,
comparable store sales increase of 2.3% were achieved despite comparing the 52-
week 1985 fiscal year to the sales of the 53-week 1984 fiscal year, due in part to the
number of customer transactions increasing by 64%. Finally, the weighted average
weekly sales per operating store declined 6% in 1985 due to the significant
increase in the ratio of the number of new stores to total stores in operation—new
stores have a lower sales rate than mature stores until they establish market share.
Gross profit in 1985 increased 59% from $114,319,000 to $181,457,000.
This increase was due to the increased sales and was partially offset by a reduction
in the gross profit margin from 26.4% to 25.9%.
Cost and expenses increased 93% during 1985 and, as a percent of sales, increased
from 20.3% to 24.2%.
Earnings before income taxes decreased 56% from $26,252,000 to $11,619,000.
The Company’s effective income tax rate declined from 46.2% to 29.3%
Resulting from an increase in investment and other tax credits as a percentage
of the total tax provision. As a percentage of sales, earnings decreased from
3.3% in 1984 to 1.2% in 1985 due to the increase in operating expenses as
discussed above.
 How well did the company perform in 1985 relative to the
previous years?

The Home Depot Ratio Calculation

DESCRIPTION FOR YEAR 1984 FOR YEAR 1985

Profit Before Taxes/Sales % EBIT 26252000 EBIT 11619000
Interest expense - 4122000 Interest expense - 10206000

Profit Before Tax 22130000 Profit Before Tax 1413000

Net Sales 432779000 Net Sales 700729000

Net sales/Assets Net Sales 432779000 Net Sales 700729000

Assets 249364000 Assets 380193000

Net sales/Assets= 432779000 Net sales/Assets= 432779000

249364000 380193000
= 1.74 = 1.84
Return on Equity % Net Income 14122000 Net Income 14122000
Shareholder Equity 80214000 Shareholder Equity 89092000

Shareholder Equity / Net Income Shareholder Equity / Net Income

= 80214000 = 80214000
14122000 8219000

= 17.6 = 9.2

Gross Profit/Sales % Gross Profit 114319000 Gross Profit 181457000

Sales 432779000 Sales 700729000

Gross Profit/Sales % Gross Profit/Sales %

= 114319000 / 432779000 = 181457000 / 700729000
= 26.4 = 25.9
Selling. General and Selling and store 74447000 Selling and store 134354000
Administrative operating exp operating exp
Expenses/Sales(%) Preopening 1917000 Preopening 7521000
Expenses Expenses
General and 12817000 General and 20555000
Admin exp Admin exp
Selling General and Admin Exp Selling General and Admin Exp
= (74447000+1917000+12817000) = (134354000+7521000+20555000)
= 89181000 = 162430000
Sales = 432779000 Sales = 700729000
 Selling. General and Administrative Selling. General and Administrative
Expenses/Sales(%) Expenses/Sales(%)
= 89181000/432779000 = 162430000/700729000
= 20.6 = 23.2
Interest Expenses /Sales % Interest Expense 4122000 Interest Expense 10206000
Sales 432779000 Sales 700729000

Interest Expenses /Sales % Interest Expenses /Sales %

= 4122000 / 432779000 = 10206000 / 700729000
= 0.95 = 1.46

Interest Income/Sales % Interest income 5236000 Interest income 1481000

Sales 432779000 Sales 700729000

Interest Expenses /Sales % Interest Expenses /Sales %

= 5236000 / 432779000 = 1481000 / 700729000
= 1.21 =01.21

Inventory Turnover Sales 432779000 Sales 700729000

Inventory 84046000 Inventory 152700000

Inventory Turnover Inventory Turnover

= 432779000 / 84046000 = 700729000 / 152700000
= 5.15 = 4.59
 How does The Home Depot's performance compare to that of
Hechinger?

Comparison between Hechinger’s Ratio and The Home Depot Ratio

For the Year 1985.

DESCRIPTION HECHINGER'S RATIOS FOR HOME DEPOT RATIOS

YEAR 1985 FOR YEAR 1985
Profit Before Taxes/Sales % EBIT 11619000
Interest expense - 10206000

7.80 Profit Before Tax 1413000

Net Sales 700729000

Net sales/Assets Net Sales 700729000

Assets 380193000
1.48
Net sales/Assets= 432779000
380193000
= 1.84
Return on Equity % Net Income 14122000
Shareholder Equity 89092000

Shareholder Equity / Net Income

15.80
= 80214000
8219000

= 9.2

Gross Profit/Sales % Gross Profit 181457000

Sales 700729000

29.30 Gross Profit/Sales %

= 181457000 / 700729000
= 25.9
Selling. General and Selling and store 134354000
Administrative operating exp
Expenses/Sales(%) Preopening 7521000
Expenses
General and 20555000
Admin exp
Selling General and Admin Exp
21.60 = (134354000+7521000+20555000)
= 162430000
Sales = 700729000
 Selling. General and Administrative
Expenses/Sales(%)
= 162430000/700729000
= 23.2
Interest Expenses /Sales % Interest Expense 10206000
Sales 700729000

2.10 Interest Expenses /Sales %

= 10206000 / 700729000
= 1.46

Interest Income/Sales % Interest income 1481000

Sales 700729000

2.20 Interest Expenses /Sales %

= 1481000 / 700729000
=01.21

Inventory Turnover Sales 700729000

Inventory 152700000

4.5 Inventory Turnover

= 700729000 / 152700000
= 4.59

Future Growth Plans:

The Company has announced plans to open nine new stores during fiscal 1986, two in the
new market of northern California and the balance in existing markets.
The Company estimates that approximately $6,600,000 per store will be required to
acquire sites and construct facilities to the Company’s specifications and that
approximately $1,700,000 will be required to open a store in leased space plus any
additional costs of acquiring the lease. These estimates include costs for site
acquisition, construction expenditures, fixtures and equipment, and in-store
minicomputers and point-of-sale terminals. In addition, each new store will
require approximately $1,800,000 to finance inventories, net of vendor financing