Case #1- Home Depot in the New Millenium

Case #1- Home Depot in the New Millenium - The Home Depot...

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FBE-421 Team Project #1 Home Depot, Inc. in the New Millennium Jack Balabanian Andrija Lisicar Erick Lugito Manya Chen Matthew Lavelle Michael Thompson Matthew Richards Kyung Moo Min
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Question 1 . Assess Home Depot’s financial performance from 1986 to 1999. What explains the decline in performance in 2000? Home Depot’s financial performance between 1986 and 1999 exhibited strong, consistent growth and value creation that is reflected in the appreciation of the company’s share price. Over the 14 year period, a sound sales strategy and strong brand identity helped spur industry leading sales and returns well in excess of its cost of capital. As a number of adverse developments began to take hold of the national economy in 2000, however, Home Depot faltered slightly. The halt in growth was unexpected, and it took a heavy toll on the company’s market value. Despite Home Depot’s problems in 2000, the company as a whole is an excellent study in value creation, and several key factors contributed to its outstanding performance. From 1986 to 1999, Home Depot’s increase in annual sales averages 32.5%. Fueled by both organic and inorganic growth, this progression in the firm’s top line translated into even greater growth in NOPAT, which increased on average at just over 40% each year. The free cash flow measured by NOPAT is an essential component of value creation, and Home Depot improved this metric substantially. Relative to the firm’s total operating capital, Home Depot maintained an average return on invested capital above 19% during the period, indicating significant value creation. For shareholders, Home Depot’s performance led to an average ROE of 25.2% during the 14 years. Improved margins, effective implementation of assets, and capitalizing on its competitive advantage and economies of scale most likely helped with the company’s success. Breaking down sales, Home Depot saw strong growth in sales per square foot, suggesting effective use of its fixed assets. As the company matured, a decline in same store sales is evident, but this is a common development in many industries. Many businesses are not able to maintain such stability and efficiency as they grow. Given Home Depot’s significant capital expenditures each year, was heavily geared toward growth. The fact that these investments led to returns greater than the cost of capital illustrates Home Depot’s strong value creation strategy through 1999. In 2000 the economic climate in the United States turned, and this brought down the company’s financial performance. Leading up to 2000, “low interest rates, strong housing turnover, rising home ownership, and increases in discretionary income” created an ideal scenario for the home improvement industry. The economy grew quickly through the 1990s and the stock market in general reached excessive valuation levels that precipitated unrealistic expectations for the future. As the Federal Reserve Board raised interest rate to curb the rate of economic growth,
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Case #1- Home Depot in the New Millenium - The Home Depot...

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