Question 1: What do the financial ratios in case Exhibit 7 tell you about the operating performance of

Home Depot over time? Consider variability, trends and what conclusions you can draw from them.

The first impression on Home Depot performance over time is the stable and good growth in Assets,
Capital and NOPAT while maintaining a relatively stable performance in terms of Profitability, Margins,
and Turnovers.

Looking at the absolute value of working capital, fixed assets, total capital and NOPAT, we can see an
increasing trend of the amount which validated the initiatives promoted by Home Depot management
such as Home Depot Supply and the Pro Stores to attach small professional market. The compound
growth (CAGR) rates for the above items were around the 20% level which was in line with the average
growth in new stores. If we compare the growth of those items with the same period growth in certain
key economic indicators such as GDP and consumption in Exhibit 6, Home Depots growth in working
capital and assets is about 4 times higher.

Profitability: Return on capital (ROC) and return on equity (ROE) are positive throughout the assessed
periods with 5 years average of 15.2% and 17.5% consecutively. It seems that there was a slightly better
performance in 1999 but the marginal change is immaterial. In general, the variability of both ROC and
ROE is low with a stable trend.

Margins: Overall trend of various margin performance indicators is stable with small fluctuation. Home
Depot was able to maintain an average gross margin of 30.5% with a deviation around +/-1%. The cash
operating experience/sales ratios were around the 20% level and increased slightly to the 21% level in
2001. However, there was also a slight increase in the gross margin so that the operating margin
remained stable during the last 5 years.

Turnover: Receivable turnover and inventory turnover were relatively high and those ratios are normal
for the industry in which the Home Depot was operating. The average receivable days is 6.4 days and the
inventory days is 73.7 days. Both turnover ratios have been gradually increasing which showed an
improvement in inventory and credit controlling process. If we had a breakdown in segment operations,
we could have a better understanding of the turnover performance for each segment.

Growth: Home Depots sales growth has gone down from the 2x% to only mid 1x% which was in the
same trend with the slowdown situation of the building-supply industry. However, Home Depot has been
able to achieve in average 10% higher than industry average growth which was impressive considering
the market size of the firm. Combining with standstill situation of same-store growth, Home Depot has to
continue the expansion in order to maintain the overall growth of the firm.
Brief conclusion: At a glance, Home Depot has proved to be a company with a leading market share and
a healthy performance with stable growth throughout the years. Despite the soft growth of the industry,
the firm has been able to maintain a stable position profit margin. However, there were signs of a
dismissing returns in the growth as the same stores sales and overall growth have not been able to catch
up with the investment in working capital and PPE.

Constraints on the analysis: The analysis could be better if we have a comparison of their main
competitor Lowes as well as more detailed information about the industrys performance in Exhibit 1.
If we have those analyses, we could benchmark Home Depots performance with industry and
competitors.

Question 2: Do you agree with Galeotafiores forecast for Home Depot? How would you adjust it?

There are certain adjustments which could be made to improve the feasibility of the forecast model:

1. Growth: Although I quite agree with the total sales growth forecast, the growth in new stores
could increase as a result of M&A activities that new CEO of Home Depot has mentioned. In
contrast, same stores sales growth showed a sudden spike from 2004 which is questionable. If we
look at Exhibit 1, industry growth was expected to bounce back and Home Depot should be about
to maintain a relatively good growth too.

2. Cost improvement: Galeotafiore has forecasted that the cash operating expense/sales remained
quite stable which was again not in line with the cost initiatives that the firm has been focusing on.
If I could adjust, I would suggest an additional improvement of 1 1.5% due to process
improvements and cost synergy resulted from the acquisitions.

3. Receivable and Inventory turnover: In the previous questions, I have explained that there was
an improvement trend in both receivable and turnover ratio. As Home Depot committed to
investing to enhance store efficiency and inventory turnover, I would expect the turnover at least
remains the same or improve rather than declined.

General conclusion: I believe the analyst has done a pretty good job in forecasting the performance of
the company. However, there was not enough information in the industrys forecasted performance for
us to base on. There were also certain pessimistic observations for the improvements and the growth of
Home Depot which I would be skeptical. As the industry was going to a consolidation, both Home Depot
and Lowes could focus on expansion through acquisition rather than eating up each others market
share.