Financial Analysis of Home Depot

For Fiscal Year Ending February 3, 2008

Presented by:

Team FAB 5

Financial Analysis of Home Depot

Introduction

Founded in 1978 by Arthur Banks and Bernie Marcus, who were both fired from a local hardware store after a disagreement with their supervisor (http://founderbios.com/bernie-marcus.php), Home Depot opened its first store in Atlanta, Georgia on June 22, 1979 (www.corporate.homedepot.com). The founders had a vision to create a big-box retail chain that empowered customers to take on their own home improvement and repair projects. As the fourth largest retailer in the U.S. and the world’s largest home improvement retailer …show more content…

HD’s inventory rate is at a satisfactory rate of 4.18 times and is able to sell merchandise inventory in an average of 87.3 days. In 2007 & 2008, HD had merchandise inventories that exceeded well over $12 & $11 million. respectively, which justifies why their inventory turnover rate was 4.18 times. HD sets the bar very high for its competitors being the number one retailer in the market by cornering the buy-it-yourself and the do-it-yourself markets. As a result of this, HD needs to carry large amounts of inventory to appease their large market base. Also, this reputation allows them to have an economy of scale on how they obtain their supplies giving them the ability to get bulk discounts that come with ordering large amounts of inventory.

4. Based on the composition of the company's CURRENT assets, what problems is the company likely to encounter if its inventories turn over at a much slower than expected rate?

Home Depot's Current assets composition contains mostly inventory, which is listed at $11.731 compared to that of the remaining balance of its current assets that totals $2.943. Consequently, Home Depot depends on a high inventory turnover for its income. As a current asset, its inventories must be able to convert into cash within a short period of time within its operating cycle in order for the company to stay financially healthy. It is noted that the company's operating cycle is approximately 98 days,