home depot financial analysis

Kickin' Assets

Lindsey Redmond and Tyler Allen

Ticker: +.89% Recommendation: +.95%

Price: 132.00 Price Target: 138.61

Earnings/Share

Mar. Jun. Sept. Dec. Year P/E Ratio

2013 $0.84 $1.25 $0.96 $0.73 $3.78 21.12

2014 1.01 1.52 1.16 1.06 4.74 21.02

2015 1.22 1.74 1.36 1.17 5.49 24.41

2016 1.47 1.47 1.48 1.49 5.93 21.85

2017 1.56 1.56 1.56 1.57 6.25 21.12

2018 1.71 1.71 1.72 1.72

6.86 19.54

2019 1.81 1.82 1.82 1.82 7.27 18.84

2020 1.92 1.92 1.93 1.93 7.71 17.99

Overview

Mission Statement: “to provide the highest level of service, the broadest selection of products

and the most competitive prices.”

Vision Statement: “to create a company that would keep alive the values that were important to

us. Values like respect among all people, excellent customer service and giving back to

communities and society.”

Summary: Home Depot specializes in the Home Improvement Industry such as housing repairs,

rental equipment, contractors, etc. Home Depot’s market demand has steadily increased over the

past decade and don’t look like they are stopping. Their stock price has almost doubled since 2005 due to past acquisitions, which promoted value to their company. Home Depot is an attractive

company to investors because they have just enough risk involved to make a larger return. Home

Depot is not afraid to make a large investment if it benefits their stakeholder’s in the long run. They

emphasize on the Do- it- Youself customer where they rent equipment but not the service. Recently, Home Depot has made acquisitions with other companies which further them in this

niche of the home improvement industry. What separates Home Depot and their competitors is

there company culture. They value every stakeholder to their firm and emphasize doing the right

thing in every circumstance. They have exceptional leaders that have a vision that coincides with the values of the company. Home Depot values more than the bottom line and this is needed to

succeed in the future market. Customer personalities are shifting towards firms with a social

responsibility. Home Depot is all about building relationships through business because they truly

care about the customer. We forecasted that Home Depot will do well in the future because they have done well historically because of management and understanding their industry well. They

also made an acquisition with Interline Brands, which increases their market share. While reducing

their costs for the Do-it-Yourself products and give them a trusted brand by customers. Home

Depot is expected to expand internationally in Mexico and Canada to diversify their portfolio so that they are not so dependent on the U.S. economy. The Home Depot Company has stores in these

countries already so they are a proven success and have potential to add more stores.

HOME DEPOT

12/14/2016

Home Improvements

ACC/FIN 425 Final Project 12/14/2016

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Business Description The Home Depot Company is the top company in the home improvement industry. This company supplies

thousands of products in their average store size of 128,000 square feet. The Home Depot serves three types of groups: Do-It-Yourself, Do-It-For-Me, and professional customers.

History Overview

Home Depot was incorporated in 1978, after Bernard Marcus and few of his coworkers found themselves out

of work due to the new ownership of Handy Dan home center chain. After working in the industry, Bernard

Marcus saw the need of Do-It-Yourself customers and decides to make a market for those customers. They

reached this customer demographic by supplying thousands of different items with a bulk stock of each of those items. Within eight years, the company was able to expand to 50 stores and reached revenues of $1

billion. As shown on the left-hand side, the historical stock price chart demonstrates the rapid growth in the

late 1980s and early 1990s. This was when the company started to see the demand and need for certain

programs, such as Do-it-for-me customer, wedding registries, and even delivery services. Home Depot kept striving for the satisfaction of the customer with items and services. They became one of the first companies

in the home improvement industry to really put focus and attention to environmentally friendly products. Not

only did they provide products for customers, but they also educated consumers of their products choices

such as light bulbs, paint, and over 70 hardware products. Home Depot soon was getting recognition form magazines, including Better Homes, which eventually led them into international markets in 1996. At first,

Home Depot was mostly focusing on operations in Canada, and then started to expand possibilities south of

the border. That year the company was ranked in the top ten largest retailers in U.S. and was up 26 percent

from the previous years earnings. Throughout the fast improvements and innovated business strategies, it is no wonder how Home Depot became the leading home improvement company in the industry.

Business Values

The Value Wheel shown on the left side, consists of the eight values that make and shape the company. Several of the items listed are ethical practices such as, "Doing the Right Thing, Respect for all People, and

Taking Care of Our People". They show appreciation for the investors, because without them they would not

be able to grow. Keeping their entrepreneurial spirit is a great value to have shape the company, because to be

able to stay at the top of the industry, the company needs to be innovative and constantly adjusting their products.

Customer Groups

Do-It-Yourself customers tend to be home owners, who purchase products and perform their improvements themselves. Many of these products consist of smaller tools, paint, and gardening products. The Home Depot

Company realizes that Do-It-Yourself customers make up a large portion of their customers and sales, so they

provide workshops and installment questions. They even try to provide information of products and

improvement recommendations online for those who cannot make it to a physical store.

Do-It-For-Me customers are home owners with a more extensive project, which includes roofing, windows,

air systems, and cabinets. The Do-It-For-Me customers purchase the products and materials, and then hire a

third party to install and complete the desired project. Home Depot will provide installment services for those materials and products, because those products are targeted for Do-It-For-Me consumers.

Professional customers consist of general contractors, small business owners, and professional renovators.

Home Depot targets these customers with their delivery, additional staff, and credit programs to keep them

loyal to the company. Typically professional customers are more loyal to the company compared to Do-It-

Yourself customers.

Environmental Program This program in the industry was one of the first of its kind, and was influenced by the company's innovated

business strategy. It allowed consumers to identify services and products that meet their specifications. The

Eco Option Program recognized the environmental needs over 10,000 products related to energy efficiency, clean air, water conservation, healthy home, and forestry sustainability. Just in the energy efficiency alone,

Home Depots innovative products "reduced U.S. carbon emissions by over 4 million metric tons" and

conserve over 70 billion gallons of water. Home Depot proudly sells the Energy Star and WaterSence

certified appliances, to expand on their Eco Options inventory.

Do-It-Yourself: Tools, Paint,

Plants, General Supplies,

Lighting, and etc.

VS

Do-It-For-Me: Roofing,

Windows, Flooring, Air Systems,

Cabinets, and etc.


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Industry Overview The home improvement and hardware industry purchase goods from manufacturers and wholesalers, and then

sell them to contractors and DIY consumers. Over the past six years this industry has been increasing due to the positive impact of the housing market and United States economy.

Stable Housing Market After couple years of recovery from the recession of the housing market and economic crash in 2008, the industry has been noticing a demand in home improvements retail. With the economy growing stronger, more

people are buying, selling, and renovating houses. Not only is this industry noticing a recovery from past

economic crisis, but it is expecting a stable increase in the years to come, in last year alone S&P’s Home

Improvement Retail Index climbed nearly 35%. According to the macro environment in the 2016 third quarter earning transcript, Home Depot believes that home price appreciation, housing turnover, household

formation and an aging housing stock in the U.S. continue to support growth in their business.

Due to the amount of homes put on the market, homeowners tend to make improvements to the house on the buy and sell side of the market. The National Association of Home Builders shows a year average of $1800

in alterations spent by homeowners. Not only have improvements been increasing, but also the construction

of new homes sales has risen higher than before the recession. The average amount spent on inventory of new

homes on the market is $233,000; this new home creates more demand for jobs in construction and the hardware industry.

However, the growth in the housing market is projected to slow down, from a 4.9 percent increase in 2016 to

a 3.9 percent estimate in 2017 according to the National Association of Realtors. Also in 2017 fewer homes are expected to be on the market compared to past years. Although there is a slightly slower increase in

percent, the market is still increasing and expects to have a stable rise over the year.

In 2016 first time buyers made up 32 percent of all home buyers and 67 percent of those are all millennial, which is the highest generation of all home buyers. Of the millennial, 89 percent bought previously owned

homes, meaning that those homeowners are likely to undergo renovation and updates Do-It-Yourself

throughout the years. (realtor.org) With the Millennial generation being larger than the Baby Boomer

generation, Census Bureau projects that 22-24 year olds are the largest population of the Millennial. These individuals are expected to grow the demand for houses and home improvements over this next decade.

Employment

According to the United States Census Bureau, in the past two years home improvement projects numbered 93.558 million and a total of $300.8 billion in expenditures, and of the expenditures $246.3 comes from

professional constructions. The home improvement industry is very supported on profession contractors and

vice versa, because of that the industry is creating a job growth in construction and hardware stores.

According to Blue Chip Economic Indicators the average U.S. unemployment rate for 2016 is forecasted to decline to 4.7%, which would be an improvement from the 5.3% average in 2015. The growth in

employment, especially in construction is a great representation of the strengthening of the industry and the

housing market.

International

As many know Home Depot and Lowes influenced and make up the large majority of the U.S. home

improvement industry. Due to the high influenced the companies have on the industry, any risky decision of

either, Lowes or Home Depot, can positively or negatively impact the industry. This could include companies

expanding and growing internationally, especially in Canada and Mexico.

As of now the Canadian housing market is going through a rapid incline in their housing market very similar

to what the housing market looked like in the U.S. in 2006. Due to the rapid increase in the housing market, there are some concerns and risks involved with the expanding and growing stores in the international

housing market. However, in Mexico there are several risks that are being forecasted because of the

weakening of the peso within the past couple years and especially in the last couple months. According to Home Depots latest earnings transcript, “Mexico and Canada reported positive comps in local currency

marking fifty-two and twenty consecutive quarters of positive comp growth, respectively”.

Overall the industry is growing and is expected to keep improving alongside the housing market. With this

positive impact on home improvement industry, it would be a consideration to invest in this industry as it continues to grow.


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Home Depot 58%

Lowes 39%

Others 3%

Industry

Competitive Positioning The U.S. home improvement industry is highly concentrated with Home Depot and Lowe's accounting for

58% and 39% of total revenues. Since these companies make up the majority of the industry, every decision can affect the industry as a whole. This puts stress on the competitors to not just stay at the top of the

industry, but maintain that position.

International Operations Recently Home Depot has been increasing their international focus, by expanding more stores to Mexico and

Canada. The CEO of Home Depot, states this last quarter that their team in Mexico has been “growing that

business and positioning us as the largest home improvement retailer in Mexico” (Home Depot, CEO).

Currently Home Depot operates 2,274 stores and 13 percent is international operations, which consists of 182 in Canada and 115 in Mexico. The percent of stores international compared to domestic may seem small, but

compared to Home Depots competitors they are…Lowes states that “Location of stores continues to be a key

competitive factor in our industry”, however their international operating does not even reach 3 percent, with

only operating 42 stores in Canada and 10 in Mexico. Similar to Home Depot, Sherwin Williams focuses on their international store expansion. Currently Sherwin Williams has 4,086 operating stores, which consists of

international operations of nearly 14 percent. Through their focus on international markets they were able to

climb to the top in “architectural paint and wood care in Ecuador” and many other countries in Latin America

(Sherwin Williams 10k). Since both Home Depot and Sherwin Williams have a greater ubiquity in the industry and it creates a greater economy of scale while lowering the company’s cost per unit of inventory.

Lowes

Lowes like the most of the industry focuses on “convenience, customer service, quality and price of merchandise and services, in-stock levels, and merchandise assortment and presentation” (Lowes 10K).

Customer service is a top priority for Lowes; they want to have an environment that appeals to Do-It-

Yourself customers. However when looking at both Home Depot and Lowes what sets their revenue

differences is their ability to sell high-ticket services or products. For instance, Lowes has an average of over 10,000 square feet in outdoor garden space, but generally those gardening products are for Do-It-Yourself

customers. Surprisingly indoor gardening contributes to the most in Home Depots net sales revenues with a

9.4% in net sales. Garden space consists of plants, which can generate more depreciation depending on the

life of the plants and quality of care the plants receive. The problem with Do-It-Yourself that the products are smaller ticket prices, but on the other hand most customers that walk into Lowes are Do-It-Youself

customers, however steering those customers towards big-ticket items and services is where the revenues

from Home Depot and Lowes differ. Home Depot focuses on Do-It-For-Me, which is the middle between

Do-It-Yourself’s and professional contractors. This includes big ticket products such as roofing, insolation, windows, and flooring. Lowes recognition of great customer service will get potential customers through the

door, but Home Depot ability to turn Do-It-Youself to Do-It-For-Me is a whole different strategy.

If Lowes is able to focus on their big ticket items, there is a chance of Lowes rising above Home Depot in average store sales. It would take a while for Lowes to catch up to the industry position of Home Depot

because Lowes would have to nearly double their annual net income, and that’s if Home Depot does not

continue to grow. At least for the next ten years or it is unlikely for Lowes to have equal or higher revenues

than Home Depot.

As far as looking at Lowes growths of their financial ratios, most everything shows an increase and steady

growth. This is mostly due to the strong growth in the housing market, which means most of the same ratios

that are increasing are also increasing for Home Depot. All of soverancy ratios for Lowes have increased at a

very steady pace as well, which could be due to their expansion of stores that are opening this next year.

Overall Home Depots higher margins and high return on equity of 110% compared to Lowes 33%, which

creates a large range of differences between the two companies. Even looking at Lowes cash balance of $405 million does not compare to the $2.2 billion of Home Depots cash and cash equivalence in 2015. Needless to

say Lowes is a great company and would be good to invest in because of the increase in the housing market,

but Home Depot is above and beyond in Lowes in numerous factors.

Sherwin Williams

Sherwin Williams is a different kind of competitor for Home Depot, but shown of Home Depot's 10K paint is

the second highest in profits. Paint represents 8.4% or 7.46 billion of 2015 annual net sales for Home Depot. Since Sherwin Williams on focuses one product and service, they focus on creating a specific target

customer. Home Depot's on the other hand, has diverse product availability and focuses on the overall target

market. The difference in business strategy helps both companies to be able to expand in similar geographic

regions.

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Reference back to international operations, Sherwin Williams has definitely made a name for themselves in

the paint side of home improvements. In fact they reached such a big demographic with their Latin America

Coating Groups that they were asked to be one of the main paint suppliers for the 2016 Rio Olympics. This

supply demand created a substantial amount of additional revenue and international marketing for Sherwin Williams. However, Sherwin Williams did notice a decrease to $18.5 million from $40.5 million in 2014,

which was relative to an 18.2% decrease in net sales due to the economic markets in Central and South

America. Even though Sherwin Williams is a large paint competitor for Home Depot in domestic and

international, Home Depot is focusing on more on Canada and a less in Mexico. This is a less risky move from Home Depot considering the unstable market of Central and South America.

Sherwin William’s gross profit margin has been over 12% higher than both Home Depot and Lowes margins

the last three years. This is mostly due to the lower expenses of costs with paint compared to other home improvement related products. It is also due to the fact that Sherwin Williams has higher quality paint that is

in demand, so they are produce higher prices, as where Home Depot is more of an average paint supplier.

Due to the Sherwin William’s higher earnings growth, the return to shareholders has reached to 25% in 2016

compared to 17% for Home Depot.

Several reasons for why Sherwin Williams is so successful today were their surprising able to withstand and

stay stable through the recession. They also only need stores with a smaller square footage because of their

lower inventory compared to Home Depot or Lowes, so they are able to reach more communities and markets. Sherwin Williams also has a deal with Lowes to sell their HGTV Home paint line, which creates

more opportunities for Sherwin Williams to reach more target consumers.

Competitors Overview Overall Home Depot is head and will be expected to stay ahead of all the companies in the home

improvement industry, because of their speedy ability to stay innovated and sale big ticket items. In our

valuation, we perceived that both Sherwin Williams and Lowe’s would be more risky than Home Depot.

Home Depot has a beta of 1.09 which means it is riskier than the market. Home Depot takes calculated risks to further their company growth. Lowe’s and Sherwin Williams are somewhat correlated because Sherwin-

Williams sells paint at Lowe’s. Although Home Depot and Lowe’s maybe in the same identical industries,

Home Depot’s business strategy of focusing on big-ticket products and services involving couple customer

groups such as; Do-It-Yourself, Do-It-For-Me and professional customer which is where most of their money is earned. Lowe’s has the strategy of selling to the Do-It-Yourself customers, but on the big ticket products or

services. Lowe’s lack of speedy innovation and expansion, they limit their potential growth. Even if Lowes

decided to concentrate on the larger services and products then they would increase in profits but they would

face fierce competition from Home Depot. Compared to their competitors in this analysis, Home Depot does well on the macroeconomic scale where Lowe’s stays more conservative with their number of stores and

Sherwin Williams maintains mostly smaller stores.

Financial Analysis For our financial forecasting, we predict that Home Depot will be successful in the future because historically

they have made the right choices strategically and have capitalized on opportunities to expand their company.

Home Depot should expand internationally through Mexico and Canada in order to diversify their portfolio and take advantage of an untapped market. We forecast that Home Depot will continue to grow their net sales

at 5.5- 6% because they recently made an acquisition with Interline Brands which is also a home

improvement company. This results in an increase in gross margin where Home Depot can use this profit to

fund other expenditures. Interline expands Home Depot’s pro division which is where most of their cash

flow is earned. Home Depot focuses on the “big ticket” items where contractors rent services or equipment.

The cost of sales declines from 6- 5.5% because as Home Depot develops internationally, they will be able to

understand the processes in each country and make it more efficient. With Home Depot valuing every aspect

of business from an ethical point of view, they will look to build relationships with suppliers which could give them a reduced cost in the future for materials. We decided to grow the SG&A expenses from a 1-2%

rate because as Home Depot goes into the foreign market, they could have unforeseen expenses they must

pay for that aren’t evident in American culture. Once they understand the nature of the foreign market and have a strong foothold, then their expenses level out or even decrease due to improvements in sales and

administrative processes. The gross profit margin increases at a steady rate of 33-34% from 2013- 2020

because although Home Depot increases their stores internationally, they already have done so in Mexico and

Canada. They have a respectable understanding of the market in each so they should perform relatively well in their new locations. The interest rates will rise slowly at 1% because although Home Depot will need new

loans, they will keep the same rate because they have proven to be successful abroad so the risk for the banks

providing the line of credit will not be so high.


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Assets

On the balance sheet, the line items are on an upward trend in assets because Home Depot will be looking to

acquire new assets to fill their new stores along with purchasing and leasing new properties. Merchandise

inventories will increase from 6.5-7% because they will have a larger number of stores to stock inventory in. The days’ inventory outstanding goes from approximately 74- 77 days because as they move new stores to

the foreign communities, it may take a while to adjust the number of inventory needed in that sector

compared to market demand. The net receivables have increased from 4-4.5% because in the Days Sales

Outstanding Home Depot becomes more efficient from about 8 days in 2015 to 7 days in 2020. The amount of Net receivables decrease they are receiving their cash sooner so that they can invest it in other ventures.

Accounts payable decreases from 5.5-5% because Home Depot is will be able to delay their credit payments

longer. The days payable outstanding declines from 41-40 days which we expect to decline in the future as

Home Depot gains a larger market share internationally. Their creditors will be willing to extend their terms because Home Depot has done well financially and is not known to default on their payments. The PPE, at

cost is a large portion of Home Depot’s assets and we chose the growth rates of 3.5-4% because they will

primarily open new property internationally. Since 2013, Home Depot has added 11 international stores but

overall about 90% of their stores reside in the U.S. This growth would level out at 4% for a couple years because the international market has a lot of potential for new stores. Depreciation stay at a constant rate of

4.5% because although Home Depot may purchase new equipment which increases the volume, they

depreciate at the same rate. With the acquisition of Interline Brands, goodwill was at 5% in 2016 because

they increased brand awareness, a larger customer base, and supplier relations with this deal. After 2015, we don’t see them making any acquisitions of this scale in the near future because this is largest Home Depot has

done in the last 10 years.

Liabilities The Accrued Salaries Expense continues to grow at 5-5.5% because Home Depot values their employees.

Moving stores abroad should not change their attitude towards employee salary. As new stores open, more

cash will be needed to fund this so this remains relatively constant. The deferred revenue decreases from 7-

4% because this acts as a cushion since Home Depot is forecasted to aggressively expand abroad. They initially will have a larger sum of unearned income but as Home Depot becomes more familiar with the

community they are in they can provide service quicker. It may be difficult to navigate the roads due to

unfamiliarity or weather conditions. Long- term debt is the largest liability because Home Depot continues to

invest in the future success of their company. They bought Interline brand for $1.625 billion dollars and according to CEO Craig Menear, this opens up a $50 billion dollar market opportunity. Also creating new

stores internationally in Mexico and Canada, the long- term debt is correlated to the purchases of PPE.

Stockholder Equity The change in retained earnings was calculated by the net earnings of the current year subtracted by the

dividends distributed. Home Depot is accustomed to giving out dividends so gave out an average of 41% of

net earnings in dividends because that is what they have done in the past. Their shareholders are used to

collecting dividends so they are the type of investor that wants another source of income. Home Depot acquires their treasury stock steadily in the future because as they buy back treasury stock, it increases their

share value since the shares outstanding is reduced. This can be one of the factors as to why the company

stock price doing so well from $82.34 in December 1, 2013 to $134.58 December 1, 2016.

Valuation In calculating the weighted average cost of capital for Home Depot, we used many factors. To find their cost

of debt, we found a weighted average of their long term and short term debt combined from Home Depot’s

annual report which was 4.2%. We used the tax rate of 36.4% because it has been consistently used

historically.

Beta

We used an original beta of 1.09 for Home Depot because it has been relatively risky in the past due to the

recession in 2008 and the data breach in 2014 so it is riskier than the market from our perspective. Moving more assets abroad also plays a factor in this because a foreign market is a lot more difficult to predict

performance than a domestic one. It requires more resources and research. Lowes and Sherwin- Williams

were calculated to have respective original betas of 1.27 and 1.4. Lowes has a higher beta than Home Depot

because they have a lower market share and are in the same industry. Lowes focuses on the Do- it- yourself customers which limits their profit potential whereas Home Depot concentrates on big ticket items such as

contractors. Lowes had a cash balance of $405 million compared to Home Depot’s $2.2 billion in 2015 which

reveals how significant the gap is between the two. This results in Lowe’s beta being higher since Home

Depot is in the same industry but has outperformed them in the past. Sherwin- Williams is directly proportional to how risky Lowe’s is because they sell their paint in that store. Sherwin- Williams’ paint is


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more expensive than Home Depot’s generic brand. Customers have been motivated by price more than

anything in the home improvement industry so this puts them at a disadvantage. For the cost of common

stock, the risk free rate and market premium were taken directly from the Ibbotson report because they

averaged out risk premia from 1926- 2010. The risk free rate was 4.1% which is based off the yield of a 20- year treasury bond. The market premium was 6.7% because Home Depot is considered a mid- cap company.

From this information, we calculated the weighted average cost of capital to be 9.84%.

Free Cash Flow A Free Cash Flow rate of 6.5% was calculated because as they expand into Mexico and Canada, Home Depot

will have more market opportunity. Less than 10% of their stores are international. In the years to come,

Home Depot will continue to grow at this rate because as of right now they already have stores abroad so

they are familiar with the surrounding communities and processes. It should be relatively easy to open new stores at new locations in Canada and Mexico. They will sustain this cash flow rate because the acquisition of

Interline Brands will reduce costs for big ticket items which can be provided internationally. This market in

Mexico and Canada has a lot of potential market value that has not been used. One U.S. dollar is valued at

about Mexican pesos so the dollar will go farther in terms of cost of setting up new store locations.

Investment Compared to the other companies in the industry and considering the overall housing market. Investing in the home improvement industry and especially in The Home Depot Company would be a profitable choice.

Home Depot is looking towards the future and expanding in new communities around the world. With their

innovated abilities and strong values, it looks as if their number one position in the industry will continue to

stay with them in the future.

Earnings per Share The Home Depot Company understands that without the shareholders they would not be able to grow and be

the number one company that they are. Knowing that, Home Depot values and wants to please their shareholders by increasing their earnings per share. Looking at the performances of 2016 third quarter

earnings report, President Menear reported that the performance metric of their earnings per share were

$1.60, up 18.5 percent compared to last years and are expected to increase $6.33 in 2016 fiscal year. Sales

also grew 6.1 percent since 2015’s third quarter earnings report. Using the price per earnings method we predicted that the earnings per share in 2020 would increase to $7.71, making the price per earnings 17.99.

This shows a higher return because in 2015 the fiscal earnings multiple was 23.6 and is expected to decrease

by 6.47 by 2020.

Cash Conversion Cycle

We were advised by Tami Vienna; Point Loma Nazarene University Accounting Alumni and retired VP

Corporate Accounting and Reporting at Edwards Lifesciences, to use this conversion to see the overall health

and management effectiveness of a company. The Days Sales Outstanding or Accounts Receivables Turnover project a slight decline from 7.79 days in 2015 to 7.26 days in 2020, which is good for Home Depot.

However, their Days Inventory Outstanding increases a steady amount, which negatively affects their overall

cash conversion cycle by making it increase 3 days from 2015 to 2020. Even though it is expected to

increase, Home Depot does a great job managing it to stay within a curtain range and not fluctuate much. This shows that The Home Depot Company is stable and looks to remain that way.

Overall, we believe that The Home Depot Company is definitely a buy. It would be a great investment,

especially with the housing market improving and the increased amount of people renovating their homes.

Home Depot has a significant industry lead above all their competitors, and looks like they will remain at that

pace a least the next couple years according to their financial forecasts.

Corporate Governance Overall Home Depot has done extremely well in the past. Most of this is attributed to how the leaders of the

company run their organization. What is helpful for them to choose the right employees and point their

company in the right direction is their core values. What makes Home Depot a strong company day in and day out is that they value excellent customer service, building strong relationships, entrepreneurial spirit,

respect for all people, creating shareholder value, doing the right thing, giving back and taking care of our

people.

Home Depot’s share price has increased exponentially over the years. On December 1, 2013, Home Depot

was valued at $82.34 per share and today they are selling at $132.52. They have aggressively expanded into

the home improvement industry and hold the largest market share. What makes Home Depot have continued success is that they are always looking for a new niche or industry to fill and improve upon. One of Home

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Free Cash Flow


8

60%

40%

Online Shoppers

Delivery In-Store Pick-up

Depot’s core values is doing the right thing for their customers, business associates, shareholders, and the

community. They have the right corporate structure and culture to be successful in the future because they are

more than the bottom line.

With the younger generations coming into the workforce, they value more than just profit margins. They are

being educated on environmental sustainability, international relations, etc. They are more aware of what is

going on and their values have shifted to be more empathetic in business. In today’s society, customers will

not buy products from a company if they don’t like the way they are ran such as maltreatment of employees or lack of pollution control. Home Depot can adapt well to the changing market because of their corporate

culture.

Additional Opportunities Home Depot is always looking to improve upon their reputation and have an edge over their competitors.

They have maintained their status as the leader of the home improvements industry, because of their

innovated change while keeping true to their business values.

Acquisitions

As of recently in 2015, Home Depot acquired Interline Brands for fee of about $1.63 billion dollars which is

evidence that they are not conservative in their long term investments. This has been their largest acquisition in nearly a decade. Home Depot is focused on the do-it-yourself type of customer and their pro division,

which are professional contractors. The acquisition of Interline aligns with this business strategy because they

offer facility maintenance, repair services, and products to home and commercial customers. Interline has a

well- known and trusted brand already such as Supplyworks and Barnett. Their corporate cultures are very similar in the fact that they value more than the bottom line. The assimilation between these two companies

will be smooth.

Expansion One of the best ways for Home Depot to grow and expand their opportunities is by reach more geographic

areas. With the demand for home improvements and renovations, there is a larger demographic of people

searching and demanding the products and/or services that Home Depot can provide. Even though technology

and online shopping is in high demand, 40 percent of their online shoppers pick-up their purchases in-stores. So having more domestic or international stores will provide greater opportunities for Home Depot in future

years.

Rising of the Millennial With the largest age group being between the ages of 22-24 years old, the search for homes and apartments

will be on the rise. Being able to market to that demographic will provide opportunities in new customer

loyalty. This group was the beginning of their generation to be impacted by technology and social media. So

being able to reach this target group would mainly be focusing on advertising and marketing. In addition, this demographic also tend to live out a more environmental friendly lifestyle compared to previous generations.

Being environmentally friendly is one of Home Depot's top business values, which will create new

opportunity for loyal customers.

Investment Risks With every investment, there are always risks. Choosing to expand more stores abroad into Mexico and

Canada could be a risk because it is a foreign market. The Mexican and Canadian economies are not as strong as the United States. Historically, Home Depot has done well with the international stores currently abroad.

Since 2013, they have added 11 new stores which all are international. Home Depot has proven that they can

do well abroad because they continue to add stores so this investment may not be as risky as some investors

may feel.

Data Breach

In 2014, there was a data breach in their cyber system where a reported 56 million cards were affected. In the

10K Home Depot mentions that they may be "liable for costs incurred by payment card issuing banks and other third parties or subject fines and other higher transaction fees". After the data breach they assured

customers that fraudulent purchases will not be charged. Home Depot hired security firms, Symantec Corp.

and Fishnet Security to investigate the breach. Home Depot had to pay $20 million to compensate customers that were harmed in this breach. The increased use of technology is constantly growing so this risk of this

happening again only rises. Home Depot has made an investment of $6.5 million in card holder security

which includes chip- reader technology.


9

International

Home Depot has a high dependence on macroeconomic factors such as the U.S. economy. With about 90% of

the Home Depot’s stores located in the United States, they are highly correlated with the success of the U.S. economy. In 2008, there was a recession which was caused by a significant number of mortgage defaults.

Revenues decreased by 7-8% during this period because the public was not buying homes which directly

affected the home improvement industry. Home Depot can reduce this dependence of the U.S. economy by

expanding more into the Mexican and Canadian markets which is what we included in our forecasts. However, when looking at the 2016 third quarter earnings transcript Home Depot's CFO, Carol Tome, stated

that "foreign currency rates, primarily a weaker Mexican peso, negatively impacted total sales growth by

approximately $76 million or .35%". As mentioned above, the unstable economy in central and South

American impacted Sherwin Williams, in 2014 they noticed an18.2% decrease in net sales. Overall the international markets offer more opportunity than risks. Home Depot's has already noticed a stable growth in

non-domestic sales over the past few years, with $8 billion in 2015 net sales.

Other risks could be affected by how the company wants to operate, but is limited due to the local laws and customs, and change in U.S. laws applicable to foreign operations and other legal and regulatory constraints.

These laws can be influenced by the change in political positions in the U.S. or international political affairs.

New President The recent change in Presidency may change several things with foreign policies and relations. With Trump

becoming the new U.S. President, he had emphasized bringing back jobs to the U.S. and increasing imported

taxes on foreign goods. This would directly affect Home Depot because they source their products directly

from the manufacturers from overseas. This import tax will create inflation in the economy causing sales to decrease. Home Depot will have an increase in cost of goods sold on all their goods that are manufactured

overseas, and have to increase sales prices to maintain and stable profit margin.

However, like the change in Presidency, most these risks cannot be prevented and are likely risks for all companies. The only risk that Home Depot is willing to take is to continue expanding into international

markets, especially in Mexico. At the same time there is still a need and demand for home improvements in

Mexico and Home Depot is get income from each store. Even though the average store income in Mexico is

not as high as it is in the U.S. there future growth opportunities. Every company needs a risk to get reward and in this case international expansion is Home Depot’s risk for reward.


10

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