Home Depot is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products.
Data from Home Depot's latest earnings announcement were used to calculate the scores posted earlier. This press release included an Income Statement, a condensed Balance Sheet, and some limited Cash Flow data, but no Cash Flow Statement.
Home Depot later filed a more complete 10-Q report, which included the details missing from the earnings announcement. We then updated the financial metrics that determine our scores to take advantage of the new information.
This post reports on the changes to the metrics and scores.
The more significant changes were due to Cash Flow from Operations (CFO) being healthier than we expected. When determining the preliminary scores, we used a bogey of $1.47 billion for CFO in the July quarter. The 10-Q reveals that CFO was actually $1.6 billion.
The latest data added one point each to the Profitability gauge (upping it from 8 to 9, of 25), Value gauge (from 7 to 8, of 25), and the Overall gauge (from 28 to 29, of 100).
The final GCFR gauge scores for the July quarter are as follows:
- Cash Management: 6 of 25 (down from 7 in April)
- Growth: 3 of 25 (up from 0)
- Profitability: 9 of 25 (up from 8)
- Value: 8 of 25 (up from 7)
- Overall: 29 of 100 (up from 27)
Because Home Depot restructured substantially in 2007, our gauge scores should be treated with an extra dose of skepticism. The GCFR approach includes comparisons between current financial data with historic results, but the validity of these comparisons degrades when the subject company reorganizes.
For the record, the updated financial metrics are listed below, with changes shown in red text.
| Cash Management | 2 Aug 2009 | 3 May 2009 | 3 Aug 2008 | 5-Yr Avg |
| Current Ratio | 1.3 | 1.2 | 1.3 | 1.2 |
| LTD/Equity | 50.4% | 53.7% | 60.9% | 36.6% |
| Debt/CFO (years) | 2.2 | 2.2 | 2.4 | 1.4 |
| Inventory/CGS (days) | 92.2 | 95.1 | 88.0 | 84.4 |
| Finished Goods/Inventory | N/A | N/A | N/A | N/A |
| Days of Sales Outstanding (days) | 7.4 | 7.5 | 7.4 | 10.0 |
| Working Capital/Invested Capital | 14.6% | 10.2% | 10.9% | 11.2% |
| Cash Conversion Cycle Time (days) | 44.8 | 42.7 | 41.0 | 42.2 |
| Gauge Score (0 to 25) | 6 | 7 | 6 | 5 |
We had estimated Debt at 2.3 years of Cash Flow from Operations, but the 10-Q showed that CFO was more robust than we had thought.
| Growth | 2 Aug 2009 | 3 May 2009 | 3 Aug 2008 | 5-Yr Avg |
| Revenue growth | -10.4% | -9.3% | -2.9% | -2.8% |
| Revenue/Assets | 151.8% | 155.7% | 148.1% | 161.4% |
| Operating Profit growth | -20.1% | -19.3% | -8.0% | -11.6% |
| CFO growth | 4.6% | -6.4% | -28.5% | 20.2% |
| Net Income growth | -27.8% | -31.7% | -28.9% | -15.6% |
| Gauge Score (0 to 25) | 3 | 0 | 0 | 4 |
We had estimated a trailing-year CFO increase of 1.9 percent, but CFO actually rose by 4.6 percent. The difference didn't add to the Growth score.
| Profitability | 2 Aug 2009 | 3 May 2009 | 3 Aug 2008 | 5-Yr Avg |
| Operating Expenses/Revenue | 92.7% | 92.6% | 91.6% | 90.2% |
| ROIC | 11.5% | 11.8% | 12.5% | 16.6% |
| Free Cash Flow/Invested Capital | 13.9% | 12.7% | 6.1% | 9.6% |
| Accrual Ratio | -4.0% | -3.1% | -20.1% | 1.1% |
| Gauge Score (0 to 25) | 9 | 8 | 8 | 9 |
Better-than-anticipated Cash Flow increased the FCF/IC ratio from 13.4 to 13.9 percent and cut the Accrual Ratio from -3.2 percent to -4.0 percent.
These two changes added a point to the Profitability score.
| Value | 2 Aug 2009 | 3 May 2009 | 3 Aug 2008 | 5-Yr Avg |
| P/E | 18.8 | 18.4 | 12.1 | 14.7 |
| P/E vs. S&P 500 P/E | 0.8 | 0.9 | 0.7 | 0.9 |
| PEG | N/A | N/A | N/A | 1.1 |
| Price/Revenue | 0.6 | 0.6 | 0.5 | 0.9 |
| Enterprise Value/Cash Flow (EV/CFO) | 10.1 | 10.4 | 10.3 | 11.9 |
| Gauge Score (0 to 25) | 8 | 7 | 15 | 9 |
Reducing the EV/CFO from 10.4 to 10.1 added one point to the score.
| Overall | 2 Aug 2009 | 3 May 2009 | 3 Aug 2008 | 5-Yr Avg |
| Gauge Score (0 to 100) | 29 | 27 | 38 | 30 |
The financial tables in the 10-Q, especially the Cash Flow statement, led to minor score increases. While the Overall results remain quite weak, we are increasingly intrigued by the amount of Cash Flow generated by Home Depot's operations ($3.3 billion in the last six months) in a very challenging time for retailers.
Full disclosure: Long HD at time of writing.
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