The Home Depot
There are two leaders for retail building-supply industry: Home Depot and Lowe’s, the two companies captured more than third of the total sale of the industry. Home Depot hold 22. 9% market shares of the industry and Lowe’s hold 10. 8% market share. Two companies are head to head competitor but focus on different market, Home Depot focused on large metropolitan areas and Lowe’s focused on rural area. Two companies both maintained online stores. Lowe’s has its own Web site: “Accent & Style” and focused on professional customer.
Home Depot developed new type of retail stores in urban area and provide products and services in a compact format. Home Depot developed its first international retailer in 1994 and 10% of Home Depot international stores were built in global area at the end of 2001. Home Depot has 1,333 stores and 256,300 employees in 2001 and Lowe’s has 744 stores and 108,317 employees in the same period time. Return on equity shows how well a company uses investment funds to generate earnings growth. Generally a return on equity between 15% and 20% are considered desirable.
Home Depot’s five year returns on equity all between 15% and 20% and Lowe’s five year returns on equity mostly less than 15%. The data prove Home Depot got higher net earnings than Lowe’s. Gross margin can use to determine the value of increasing sales. The higher gross margin means the company does a better job on turning material into the income. Gross margin can guide the pricing decision and retailers can calculate profit by using the gross margin. Gross margin show that Home Depot had more profit and less cost than Lowe’s. The purpose of operating margin is to measure levels and rates of profitability.
The most common way for a company to decide the success or failure is to analysis the net profits of the business. A higher operating margin is indispensable for a company to pay for its fixed costs, such as interest on debt. Operating margin show that Home Depot got better return on sales than Lowe’s. The higher working capital turnover is better because it means that the company is generating a lot of sales and the higher efficient utilization of assets. Home Depot has stronger sales than Lowe’s. The inventory turnover measures how quickly you are moving inventory through your warehouse.
Comparison sales per transaction of Lowe’s are larger than Home Depot, the increasing speed for comparison sales per transaction of Lowe’s is much faster than Home Depot and continued year by year. Comparing and analysis all the data, the Home Depot have better developing situation than Lowe’s from 2007 to 2001, Home Depot use funds and assets much more reasonable and efficiency than Lowe’s, Home Depot earning more profit than Lowe’s in five years period time.
The numbers of sales are stronger than Lowe’s. Comparison sales per transaction of Lowe’s and comparison sales per store of Lowe were increasing more rapidly than Home Depot, and Lowe’s had larger debt than Home Depot. Value Line Publishing is in the business of producing financial forecasts to aid individuals and institutions in the analysis of potential investments. The nature of forecasting the future state of companies and their underlying stock prices is inherently difficult for multiple reasons.
Evaluating the countless variables that influence stock price movements is a subjective task that requires a combination of understanding of market and economic concepts and the ability to implement those concepts in relation to industry and firm-specific levels. As an analyst for Value Line Publishing, Carrie Galeotafiore was responsible for preparing an analysis of Home Depot and Lowe’s. Carrie’s background in the home supply industry was robust; however the economic conditions present in 2002 were unique and had led to a never before seen state in the home supply industry.
A mix of economic conditions had been present for the years leading up to 2002 that had resulted in major gains for the home improvement sector. These conditions were steady economic growth, low interest rates and a thriving housing market. As industry leaders, Home Depot and Lowe’s had reaped the rewards of the favorable market conditions. They both exhibited sales and store growth that would leave other organizations envious. Donald Trott, a financial forecaster and analyst at Jeffries exhibited concerns about the economic conditions that had led the successes of Home Depot and Lowe’s.
He warned that the growing economy and the state of the housing sector it produced were on the brink of a market bust. Just as Carrie Galeotafiore, Donald Trott was in the business of forecasting. While the future economic environment is always uncertain, there were many indicators backing up Mr. Trott’s view. Rising unemployment, weak consumer confidence and the lack of direction among major corporations indicated that one should air on the side of caution when forecasting the future of corporations in the United States. In the latter half of the 1990’s, Home Depot had become the most successful retailer in the home improvement industry.
The store had enjoyed great sales growth through expansion and acquisition; however, they were not alone. Lowe’s was showing signs of stabling and was threating to catch up to the Home Depot by focusing on their strong management competencies and by moving their business into more urbanized areas; a market they had not yet tapped. Carrie Galeotafire had followed the retail building industry for nearly three years. This would normally be an ample amount of time to develop expert insight into a given market sector; however, the retail industry had experience many changes in the past decade.
The expansions of home Depot and Lowe’s through store growth and acquisition had changed the landscape the building supply and hard ware industry operated on; further complicating the job of Carrie Galeotafire and Value Line Publishing. Forecasting the future of Home Depot and Lowe’s would not be an east undertaking. Home Depot operated very well for the last five years. In the meantime, Lowe’s is catching up with Home Depot and may exceed Home Depot on sales in next few years. The sales per transaction at Lowe’s have been superior in comparison to those of Home Depot since 1998.
Both Home Depot and Lowe’s have to potential to hinder each other’s future growth. The low interest rate can stimulate the growth of housing market, and then the housing market will improve the market of home improvement industry. If the economic circumstance changes in the future, the high interest rate cannot drive the growth of housing market. The home improvement industry may meet a huge impact if the housing starts rate decreases. For the home improvement industry, it is not enough that just depends on the low interest rate to stimulate the growth.
They also need to find more new growth points and fix the old strategies which can make the companies adopt economic environment change faster. For both company, they can diversify the commodities which extend from existing commodities. The can redesign the old goods and make it especial. The new commodities can attract more new customers. Customers like trying new staff. The new gadgets will keep customers stay in the store for long. The longer the customer stay, the more inventories the store will sell. In the next decade, the domestic markets will saturation.
Internal market becomes more and more important for both companies. Home Depot has already developed the transnational stores in Canada and Mexico. Since Lowe’s does not have any international business exist, it is urgent to find the new growth point in other countries. The important strategy for both companies is to decelerate. The two companies especially Lowe’s is growing too fast than average. The high speed of growth for Lowe’s depended on the large amount of debts. The large debt will help Lowe’s increase fast in the low interest rate, but it cannot be maintained in the future.
It is necessary for them to reduce the speed of expending. Home Depot was very attractive in 1997 to 2001. Depends on the prediction of cumulative stock returns, the stock price of Lowe’s will surpass the stock price of Home Depot in 2002. It is a challenge for Home Depot to maintain the same attractiveness. Depends on the strategies now, Home Depot need to improve the customer service, retrain their employees and try to cut the cost. Nowadays, a lot of customers are price sensitive. And also the Home improving industry is a price sensitive industry.
Price always leads customers. If Home Depot can lower its cost, it will help Home Depot maintain its attractiveness. Because of the debt, high speed of expansion will cause more risk to this company. It is necessary for Lowe’s to reduce the debt in the next few years even it had a successful performance in 1997 to 2001. Lowe’s has begun systematic expansion into metropolitan markets. It is not a good idea for Lowe’s. Home Depot has been operating in the metropolitan markets for years. If Lowe’s rushed join the metropolitan market, it may cause more risk to the company.