Home Depot Financial Analysis

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(Note: all $ amounts are stated in millions)


a) There are 3 years covered in the following primary comparative financial statements, namely fiscal years ended 1 February 2004, 2 February 2003 and 3 February 2002:
• Consolidated Statement of Earnings
• Statement of Stockholders Equity and Comprehensive Income
• Consolidated Statements of Cash Flows

There are 2 years covered in the Consolidated Balance Sheet, namely fiscal years ended 1 February 2004 and 2 February 2003.

All of the primary comparative financial statements were audited, namely the Consolidated Balance Sheet, the Consolidated Statement of Earnings, the Statement of Stockholders Equity and Comprehensive Income and the Consolidated Statements of
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Home Depot also has a back up credit facility with a consortium of banks for up to $800 million.

a) Refer to workings 5 to 10 in the Annexure.

1 Feb 2004 2 Feb 2003
% change net sales 11.3% 8.8%
% change net earnings 17.5% 20.4%
GP rate 31.8% 31.1%
Net income as % of sales 6.6% 6.3%
ROA 21.2% 20.7%
ROE 20.4% 19.3%

b) Profitability Ratios:
(i) Net sales growth
Net sales growth has increased from a rate of 8.8% in 2 Feb 2003 to 11.3% in 1 Feb 2004. This growth could have originated from price growth (effect of price increase) and/or volume growth (increased sales due to opening of new stores and increase in product range). Whilst the growth is still positive, this is at a lower rate that that achieved in the previous five years (average growth of 22.4% - Refer to working 11 in the Annexure). One possible reason for this is the US economic expansion in the 1990’s which lead to a rapid growth in the Home Improvement industry.

(ii) Gross Profit (GP) rate:
The Gross Profit rate has increased from a rate of 31.1% in 2 Feb 2003 to 31.8% in 1 Feb 2004. There has been a consistent improvement in this ratio for the past eight years. The following reasons are attributable to the GP rate increase:
- change in customer preferences (purchase of product with higher margins – mix ratio)
- continuing benefit arising from the centralized purchasing group
- improved inventory management resulting in lower shrinkage levels
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