Samantha Luna

FINA 4383-90L

CASE 1: Home Depot vs. Lowes

Case 1 Summary: Home Depot Vs. Lowes

Within this retail building-supply industry the ‘Economist Intelligent Unit” (EIU) traditionally

divided the industry into 3 retail formats being: hardware stores, lumberyard, and large home-

format centers. Home Depot and Lowes doubled their own-store capacity by opening various

new stores within 5 years making them the top two companies to dominate the industry. Both

stores started purchasing various types of companies attracting more professional clientele.

Home Depot had an international presence by 2002 meanwhile, Lowes had a presence in the

United States and online only. The retailing format strategies they used were quite different.

Lowes retailed online showcasing their products as “Accent & Style” and Home Depot

showcased within EXPO design centers in 8 showrooms. Establishing some head-to-head

competition, Lowes is a rural area based and Home Depot is a metropolitan area. As Lowes

began to expand there were various concerns about Lowe’s outperforming Home Depot prices

and how Home Depot was going to handle the situation. As both companies received a financial

forecast some viewed Home Depot good, and some viewed that Lowe’s was giving a more

outstanding performance since they state that Home Depot’s customer service had gone down.

Bob Nardelli, the new CEO of Home Depot expressed his plan for margin improvement. Both

companies had their good and their bad outcomes; it’s just a matter of what company is

providing outstanding work for not only themselves but their customers and especially

shareholders. However, apart from providing their exceptional work also what company has

better market performance within their ratio analysis.

.
 Samantha Luna
FINA 4383-90L

CASE 1: Home Depot vs. Lowes

These companies both had very good numbers within their ratio but, it is all in the

matter of which ratios served the best for the company itself to outgrow in the retail building-

supply industry. The calculations of the ratios were in my judgment are more in favor of Lowes

rather than Home Depot. The company Lowes is worthy and justified for the “Management of

the Year” award for having a good standing in liquidity, their receivable turnovers upon the

ratio, and having outstanding performance on ratios.

As stated, my chosen company which is Lowes stood in a better liquidity position rather

than our industry peer Home Depot with the current ratio of Lowes having a 4.55 and Home

Depot a 1.59. This ratio is very differentiated meaning that Lowes has more current assets

(13,736) than current liabilities (3017) making this have a higher ratio from Home Depot's

current ratio by 2001. As we recall, Lowe's major trajectory plan was to transition meticulously

into the metropolitan market since they were just located inside the ranges of rural areas, using

their borrowing money to expand from the debt-to-equity cash flow for potential growth.

The second reason to support my choice to providing Lowes with the Management of

the Year award is the transition from their accounts receivables. When you hear that word it’s

something that you do not find a good enough reason to give the award to. As both Home

Depot and Lowes used a strategy to attract professional customers within large stocking

merchandising, employee training, buying companies, etc. Lowes concentrated on becoming

the supplier to the professional customers even when reaching out into a different type of

market. This company had fewer account receivables and fewer sales and had double the
 Samantha Luna
FINA 4383-90L

CASE 1: Home Depot vs. Lowes

receivable turnover than Home Depot. Meaning that they can convert their debt into cash

twice as fast as Home Depot.

Last but not least are the outstanding ratios Lowes provided. Lowes Inventory Turnover

Ratio shows how they convert their inventory management slower than Home Depot. In the

ratio analysis, we discovered that the inventory turnover was higher for Home Depot making

their inventory processing period faster with a 16.75-day difference. Even though the Inventory

Turnover was not in favor of Lowes having the low number does not always mean a bad thing

making the company’s inventory bad. A high turnover can be either through the numerous

amounts of sales that Home Depot made or the insufficient Inventory. I am going for

Insufficient Inventory because their Receivable turnover rate is half the receivable turnover rate

as I stated within my second reason supporting Lowes Ratio Analysis. The receivable turnover

rate means that they cannot turn their debt into cash as fast as Lowes.

Exhibit 2 shows a detailed graph that collects semiyearly data for the stock market

performance for Home Depot, Lowes, and S&P 500. Stock market performance is consistent

with my ratio analysis. Lowes had better outstanding on getting cash flows from transitioning

their debts, current ratio, current assets, debt-to-equity, and quick ratios. In the stock market

performance graph, you can see that Lowes has almost a $5 cumulative stock return, while

Home Depot has an estimated $2.5 cumulative stock return.

Within my ratio analysis I can conclude that Lowes is justified for the “Manager of the

Year” award rather than our industry peer Home Depot. It can also be stated that the ratio
 Samantha Luna
FINA 4383-90L

CASE 1: Home Depot vs. Lowes

analysis did match with the stock market performance which is detailed semiyearly making

Lowes the top choice.