Assess Home Depot’s financial performance from 1986 to 1999.
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
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%.
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.
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.
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,