Granados 1

Dalila Granados

Professor Wallace

Accounting 2301

August 11, 2010

The Home Depot

A. Introduction

Francis S. Blake is the Chairman, CEO, and Chief Executive of The Home Depot.

The Home Depot’s home office is based at 2455 Paces Ferry Road NW Atlanta,

GA 30339. The ending fiscal year was January 31, 2010. The Home Depot stores sell

building materials, home improvement supplies, and lawn and garden products to do-it-

yourself customers, do-it-for-me customers, home improvement contractors, trades

people, and building maintenance professionals. The company manages The Home Depot

and EXPO Design Center stores that offer numerous installation services, including

products such as carpeting, countertops, cabinets, flooring, and water heaters primarily to

business-to-business customers, including home builders, professional contractors,

municipalities, and maintenance professionals. They also provide professional installation

of many different products through its in-home sales programs, like generators, furnaces,

and central air systems. Most of The Home Depot’s activity is primarily in the United

States, Canada, Mexico, and they have recently broadened out to China. The financial

statements of The Home Depot are audited by KPMG LLP, an independent registered

public accounting firm. KPMG LLP states that The Home Depot is following all

procedures required of them to provide adequate and precise financial statements. The

responsibility of the financial statements lies with managers. The managers are
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responsible for the effective control internally for the financials. The closing market price

as of 07/30/2010 is $28.51, while the dividend per share for the year is 0.95. The Home

Depot is traded on the New York Stock Exchange (NYSE) under Dow and its ticker

symbol is ‘HD’. Internet site address for The Home Depot is

<http://www.homedepot.com>.

B. Industry Situation and Company Plans

The management and leadership has been implementing changes in their stores to

make customer experience simpler, more consistent, and continuing to provide even more

customer focus. Francis S. Blake, Chairman and Chief Executive Officer, knows that the

key to success is to be focused on the retail business, investing in their employees,

improving Home Depot stores, bringing outstanding products and services to consumers,

as well as driving a high return on invested capital, and returning excess cash to

shareholders.

C. Financial Statements

Income Statement

• The format consists of a multi-step format.

• Gross Profit: $22.4 Billion

• Income from Operations: $4.8 Billion

• Net Income for last 2 years: $4,921,000,000

• Trend: The trend shows that from 2007 to 2009 there was a decrease in profit,

revenue, and income. If this trend continues, 2010 will also show a decline.

Balance Sheet

• Assets= Liabilities + Stockholders’ Equity

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($40,877,000,000+$41,164,000,000) = ($21,484,000,000+$23,387,000,000) +

($19,393,000,000+$17,777,000,000)

$82,041,000,000 = $44,871,000,000 + $37,170,000,000

$82,041,000,000 = $82,041,000,000 for years 2009 and 2008.

Cash Flow

• The cash flow from operations is more than the income for each of the past two

years.

• Main Investing Activity (Cash Outflows): Capital Expenditures

• Most Important Source of Financing (Cash Inflow): Net Borrowing

Overall cash has decreased over the past two years.

D. Accounting Policies

The following information is taken from The Home Depot’s Form 10-K:

Revenues

“The Company recognizes revenue, net of estimated returns and sales tax, at the time the

customer takes possession of merchandise or receives services. The liability for sales

returns is estimated based on historical return levels. When the Company receives

payment from customers before the customer has taken possession of the merchandise or

the service has been performed, the amount received is recorded as Deferred Revenue in

the accompanying Consolidated Balance Sheets until the sale or service is complete. The

Company also records Deferred Revenue for the sale of gift cards and recognizes this

revenue upon the redemption of gift cards in Net Sales. Gift card breakage income is

recognized based upon historical redemption patterns and represents the balance of gift

cards for which the Company believes the likelihood of redemption by the customer is
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remote. During fiscal 2009, 2008 and 2007, the Company recognized $40 million,

$37 million and $36 million, respectively, of gift card breakage income. This income is

recorded as other income and is included in the accompanying Consolidated Statements

of Earnings as a reduction in SG&A.”

Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities

of three months or less to be cash equivalents. The Company's Cash Equivalents are

carried at fair market value and consist primarily of high-grade commercial paper, money

market funds and U.S. government agency securities.

Merchandise Inventories

The majority of the Company's Merchandise Inventories are stated at the lower of cost

FIFO or market, as determined by the retail inventory method. 82% was approximately

valued under the retail inventory method. As the inventory retail value is adjusted

regularly to reflect market conditions, the inventory valued using the retail method

approximates the lower of cost or market. Certain subsidiaries, including retail operations

in Mexico and China, and distribution centers record Merchandise Inventories at the

lower of cost FIFO or market, as determined by the cost method. These Merchandise

Inventories represent approximately 11% of the total Merchandise Inventories balance.

The Company evaluates the inventory valued using the cost method at the end of each

quarter to ensure that it is carried at the lower of cost or market. The valuation allowance

for Merchandise Inventories valued under the cost method was not material to the

Consolidated Financial Statements of the Company as of the end of fiscal 2009 or 2008.

Depreciation and Amortization

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The Company's Buildings, Furniture, Fixtures and Equipment are recorded at cost and

depreciated using the straight-line method over the estimated useful lives of the assets.

Leasehold Improvements are amortized using the straight-line method over the original

term of the lease or the useful life of the improvement, whichever is shorter. The

Company's Property and Equipment is depreciated using the following estimated useful

lives:

Life
Buildings 10-45 years
Furniture, Fixtures and Equipment 3-20 years
Leasehold Improvements 5-45 years

Topics of Financial Statement Notes:

• Summary of Significant Account Policies

• Disposition and Acquisitions

• Staff Accounting Bulletin No. 108

• Intangible Assets

• Debt

• Income Taxes

• Employee Stock Plans

• Leases

• Employee Benefit Plans

• Basic and Diluted Weighted Average Common Shares

• Commitment and Contingencies

• Quarterly Financial Data (Unaudited)

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E. Ratio Analysis

Tests of profitability

1. Return on Equity = (Net Income / Average Stockholders’ Equity)

2009: 14.3% = (2661/ ((19393 + 17777)/2))

2. Return on Assets = (Net Income + Interest Expense (net of tax) / Average Total

Assets)

2009: 8.5% = ((2661 + 821) / ((44,324 + 52,263) / 2)

3. Financial Leverage = (Return on Equity – Return on Assets)

2009: 5.8% = (14.3% – 8.5%)

4. Earnings per Share = (Net Income / Average Number of Shares of Common Stock

Outstanding)*

2009: 1.55 = (2661/ 1716)

2008: 1.32 = (2260 / 1707)

5. Quality of Income = (Cash flow from Operating Activities / Net Income)*

2009: 1.93 = (5125 / 2661)

2008: 2.45 = (5528 / 2260)

6. Profit Margin = (Net Income / Net Sales Revenue)*

2009: 4.0% = (2661 / 66176)

2008: 3.2% = (2260 / 71288)

7. Average Fixed Asset Turnover Ratio = (Net Sales Revenues / Average Net Fixed

Assets)

2009: 2.096 = (77349 / ((37345 + 36477) / 2)

Tests of Liquidity
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8. Cash ratio = ((Cash + Cash equivalents) / Current liabilities)*

2009: .137 = 1421 / 10363

2008: .047 = 519 / 11153

9. Current ratio = (Current Assets/ Current Liabilities)*

2009: 1.34 = 13900 / 10363

2008: 1.20 = 13362 / 11153

10. Quick ratio = (Quick Assets / Current Liabilities)*

2009: 0.36 = ((13900 – 10188) / 10363))

2008: 0.24 = ((13362 – 10673) / 11153))

11. Receivable turnover = (Net Credit Sales / Average Net Receivables)

2009: 68.14 = (65955 / ((964 + 972) / 2))

12. Inventory Turnover = (Cost of Goods Sold / Average Inventory)

2009: 8.39 = (43764 / ((10188 + 10673) / 2))

Tests of Solvency and Equity

13. Times Interest earned = ((Net Income + Interest Expense + Income Tax Expense) /

Interest Expense)*

2009: 6.95 = ((2661 + 676 + 1362) / 676)

2008: 6.67 = ((2260 + 624 + 1278) / 624)

14. Cash Coverage = (Cash flow from operating activities / Interest paid)

2009: 7.58 = (5125 / 676)

15. Debt-to-Equity Ratio = (Total liabilities / Stockholders’ equity)

2009: 1.11 = (21484 / 19393)

Market Tests
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16. Price / Earnings Ratio

16.79 = 28.51 / 1.698

17. Dividend Yield Ratio = (Dividends per share / Market price per Share)

3.4% = 0.95 / 28.51

F. Physical Statements

Income Statements

PERIOD ENDING 3-Feb-08 28-Jan-07 29-Jan-06

Total Revenue 77,349,000 90,837,000 81,511,000
Cost of Revenue 51,352,000 61,054,000 54,191,000
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Gross Profit 25,997,000 29,783,000 27,320,000

Operating Expenses
Research Development - - -
Selling General and Administrative 17,053,000 18,348,000 16,485,000
Non Recurring - - -
Others 1,702,000 1,762,000 1,472,000

Total Operating Expenses - - -

Operating Income or Loss 7,242,000 9,673,000 9,363,000

Income from Continuing Operations

Total Other Income/Expenses Net 74,000 27,000 62,000
Earnings Before Interest And Taxes 7,316,000 9,700,000 9,425,000
Interest Expense 696,000 392,000 143,000
Income Before Tax 6,620,000 9,308,000 9,282,000
Income Tax Expense 2,410,000 3,547,000 3,444,000
Minority Interest - - -

Net Income From Continuing Ops 4,210,000 5,761,000 5,838,000

Non-recurring Events
Discontinued Operations 185,000 - -
Extraordinary Items - - -
Effect Of Accounting Changes - - -
Other Items - - -

Net Income 4,395,000 5,761,000 5,838,000

Preferred Stock And Other Adjustments - - -

Net Income Applicable To Common Shares $4,395,000 $5,761,000 $5,838,000

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Balance Sheet

View: Annual Data | Quarterly Data All numbers in thousands

PERIOD ENDING 3-Feb-08 28-Jan-07 29-Jan-06

Assets
Current Assets
Cash And Cash Equivalents 445,000 600,000 793,000
Short Term Investments 12,000 14,000 14,000
Net Receivables 1,259,000 3,223,000 2,396,000
Inventory 11,731,000 12,822,000 11,401,000
Other Current Assets 1,227,000 1,341,000 742,000

Total Current Assets 14,674,000 18,000,000 15,346,000

Long Term Investments 342,000 343,000 348,000
Property Plant and Equipment 27,476,000 26,605,000 24,901,000
Goodwill 1,209,000 6,314,000 3,286,000
Intangible Assets 100,000 778,000 -
Accumulated Amortization - - -
Other Assets 523,000 223,000 601,000
Deferred Long Term Asset Charges - - -

Total Assets 44,324,000 52,263,000 44,482,000

Liabilities
Current Liabilities
Accounts Payable 9,185,000 11,279,000 9,731,000
Short/Current Long Term Debt 2,047,000 18,000 1,413,000
Other Current Liabilities 1,474,000 1,634,000 1,757,000

Total Current Liabilities 12,706,000 12,931,000 12,901,000

Long Term Debt 11,383,000 11,643,000 2,672,000
Other Liabilities 1,833,000 1,243,000 977,000
Deferred Long Term Liability Charges 688,000 1,416,000 1,023,000
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Minority Interest - - -
Negative Goodwill - - -

Total Liabilities 26,610,000 27,233,000 17,573,000

Stockholders' Equity
Misc Stocks Options Warrants - - -
Redeemable Preferred Stock - - -
Preferred Stock - - -
Common Stock 85,000 121,000 120,000
Retained Earnings 11,388,000 33,052,000 28,943,000
Treasury Stock (314,000) (16,383,000) (9,712,000)
Capital Surplus 5,800,000 7,930,000 7,287,000
Other Stockholder Equity 755,000 310,000 271,000

Total Stockholder Equity 17,714,000 25,030,000 26,909,000

Net Tangible Assets $16,405,000 $17,938,000 $23,623,000

Cash Flow

View: Annual Data | Quarterly Data All numbers in thousands

PERIOD ENDING 3-Feb-08 28-Jan-07 29-Jan-06
Net Income 4,395,000 5,761,000 5,838,000

Operating Activities, Cash Flows Provided By or Used In

Depreciation 1,906,000 1,886,000 1,579,000
Adjustments To Net Income 207,000 297,000 253,000
Changes In Accounts Receivables 116,000 96,000 (358,000)
Changes In Liabilities (438,000) 231,000 (62,000)
Changes In Inventories (491,000) (563,000) (971,000)
Changes In Other Operating Activities 32,000 (47,000) 205,000

Total Cash Flow From Operating Activities 5,727,000 7,661,000 6,484,000

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Investing Activities, Cash Flows Provided By or Used In

Capital Expenditures (3,558,000) (3,542,000) (3,881,000)
Investments (326,000) 25,000 1,677,000
Other Cashflows from Investing Activities 8,642,000 (4,130,000) (2,382,000)

Total Cash Flows From Investing Activities 4,758,000 (7,647,000) (4,586,000)

Financing Activities, Cash Flows Provided By or Used In
Dividends Paid (1,709,000) (1,395,000) (857,000)
Sale Purchase of Stock (10,539,000) (6,303,000) (2,626,000)
Net Borrowings 1,714,000 7,526,000 1,871,000
Other Cash Flows from Financing Activities (105,000) (31,000) -

Total Cash Flows From Financing Activities (10,639,000) (203,000) (1,612,000)

Effect Of Exchange Rate Changes (1,000) (4,000) 1,000

Change In Cash and Cash Equivalents ($155,000) ($193,000) $287,000

G. Investing Recommendation

In my own personal opinion, I would not invest in The Home Depot because they

are showing a steady decrease in many aspects of their company. The Return on Equity

ratio is lower than average which indicates that The Home Depot is less efficient than in

previous years. The average is 20.83 while for the year of 2007 it reported a ROE of

19.70. Compared to the industry The Home Depot has less ROE than the five year

average but is slightly above on the current year.

Another decline is the Return on Assets. The current ROA (which is 8.72) is less

than the average (which is 11.78) of the last five years of the company and slightly less

than the industry, which is 8.77. The decrease in this ratio indicates that the company is

not efficiently using its assets.

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The most important reason for my opinion is due to the fact that the Earnings per

Share ratio has also been going down. The basic EPS ratio from 2006 to 2007, dropped

from 2.80 to 2.38. This ratio is used to evaluate the operating performance and

profitability of a company. In Home Depot’s case, this means that their performance is

lacking and their profitability is diminishing.

Basically, during this time I feel that our economy is going through a recession

and most, if not all, companies are feeling the affects, as well as The Home Depot. This is

a great company but unless the economy changes you wont be seeing me investing in any

company. You never know, maybe The Home Depot has a few tricks up their sleeves.

They have been around a long time, which means that they have seen bad times. They

might just jump up from their slump and prove everyone wrong, including me.
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Works Cited

http://stocks.us.reuters.com/stocks/ratios.asp?symbol=HD

http://ir.homedepot.com/EdgarDetail.cfm?

CompanyID=HD&CIK=354950&FID=1047469-08-4077&SID=08-00

http://finance.yahoo.com/q/pr?s=HD