Non-GAAP "adjusted" earnings, which exclude various charges and discontinued operations, increased from $0.35 to $0.45 per share, a rise of 29 percent.
In our earlier review of Home Depot's Income Statement, we compared the actual results to our "look-ahead" estimates. Reported earnings were $0.04 better than the $0.39 per share we had forecast.
We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value for Home Depot. This post reports on the metrics and the associated financial gauge scores. The metrics were calculated using data from Home Depot's current and historical financial statements, including the latest 10-Q report.
The Home Depot, Inc. (NYSE: HD) is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products. The company operated 2,244 retail stores at last count, of which 1,976 (88 percent) were in U.S. states or territories. Home Depot competes with Lowe's (NYSE: LOW), cooperatives such as Ace and True Value, and a multitude of smaller hardware stores. Additional background information about Home Depot and the business environment in which it is currently operating can be found in the look-ahead.
In summary, Home Depot's latest quarterly results produced the following changes to the gauge scores:
- Cash Management: 7 of 25 (unchanged from January)
- Growth: 8 of 25 (up from 5)
- Profitability: 12 of 25 (up from 11)
- Value: 0 of 25 (unchanged)
- Overall: 22 of 100 (up from 21)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere. Caution is suggested when comparing Home Depot's results before and after the company's restructuring in 2007.
| Cash Management | 02 May 2010 | 31 Jan 2010 | 03 May 2009 | 5-Yr Avg |
| Current Ratio | 1.2 | 1.3 | 1.2 | 1.2 |
| LTD/Equity | 39.6% | 44.7% | 53.7% | 42.2% |
| Debt/CFO (years) | 1.8 | 1.9 | 2.2 | 1.7 |
| Inventory/CGS (days) | 90.5 | 89.9 | 92.4 | 88.3 |
| Finished Goods/Inventory | N/A | N/A | N/A | N/A |
| Days of Sales Outstanding (days) | 6.6 | 6.2 | 7.2 | 9.8 |
| Working Capital/Revenue | 4.9% | 4.8% | 3.8% | 4.4% |
| Cash Conversion Cycle Time (days) | 46.4 | 48.2 | 45.2 | 44.7 |
| Gauge Score (0 to 25) | 7 | 7 | 7 | 7 |
Home Depot has slowly but surely been trimming the amount of debt it has outstanding. Long- and short-term debt totaled $9.7 billion at the end of the latest quarter, from $11.4 billion one year earlier. Long-term debt to
The company notes in its 10-Q that its "current cash position, access to the debt capital markets and cash flow generated from operations should be sufficient to enable us to complete our capital expenditure programs and fund dividend payments, any share repurchases and any required long-term debt payments through the next several fiscal years. In addition, we have funds available from our commercial paper programs and the ability to obtain alternative sources of financing."
Inventory measured in terms of days of Cost of Goods Sold is down slightly from last year. This improvement in efficiency wasn't significant enough to improve the gauge score, but the trend is encouraging.
The reduction in Days of Sales Outstanding is also a sign of better cash efficiency. The latter two metrics also helped cut the Cash Conversion Cycle Time. However, the latter measure is still a day higher than it was one year ago.
| Growth | 02 May 2010 | 31 Jan 2010 | 03 May 2009 | 5-Yr Avg |
| Revenue growth | -3.9% | -7.2% | -9.3% | -4.9% |
| Revenue/Assets | 153.0% | 161.3% | 155.7% | 155.3% |
| Operating Profit growth | -11.8% | -15.7% | -19.3% | -13.1% |
| CFO growth | 5.5% | -7.3% | -6.4% | 8.1% |
| Net Income growth | 14.6% | 13.3% | -31.7% | -11.0% |
| Gauge Score (0 to 25) | 8 | 5 | 0 | 3 |
The trailing-year growth rates for both Cash Flow from Operations and Net Income are now positive, which reversed the contractions observed last year. Special charges last year associated with store closures and exiting businesses made it easy for the current year to look better in comparison.
| Profitability | 02 May 2010 | 31 Jan 2010 | 03 May 2009 | 5-Yr Avg |
| Operating Expenses/Revenue | 92.3% | 92.5% | 92.6% | 90.7% |
| ROIC | 12.6% | 11.6% | 11.8% | 15.0% |
| Free Cash Flow/Invested Capital | 16.6% | 14.8% | 12.7% | 11.2% |
| Accrual Ratio | -4.0% | -4.2% | -3.1% | -0.9% |
| Gauge Score (0 to 25) | 12 | 11 | 8 | 9 |
The Return on Invested Capital has been recovering, although it's still less than its five-year average. The ROIC has held up better than we would have expected in a difficult retailing environment.
Free Cash Flow has improved significantly because Home Depot has slashed capital spending.
A lower Accrual Ratio, when compared to last year, is sign of improved earnings quality.
| Value | 02 May 2010 | 31 Jan 2010 | 03 May 2009 | 5-Yr Avg |
| P/E | 20.7 | 17.8 | 18.0 | 14.9 |
| P/E vs. S&P 500 P/E | 1.1 | 0.9 | 0.9 | 0.8 |
| PEG | N/A | N/A | N/A | 1.2 |
| Price/Sales | 0.9 | 0.7 | 0.6 | 0.8 |
| Enterprise Value/Cash Flow (EV/CFO) | 12.3 | 10.9 | 10.2 | 12.0 |
| Gauge Score (0 to 25) | 0 | 0 | 7 | 8 |
| Share Price ($) | $35.23 | $28.01 | $25.77 | - |
Although earnings growth has resumed, the share price through April increased at a faster pace. This enlarged the P/E multiple to a figure deemed excessive by the Value gauge's scoring criteria. The Price/Sales ratio has also expanded.
The share price has now fallen to $31.55. This decline brings the P/E down to 18.5 and P/S to 0.8.
| Overall | 02 May 2010 | 31 Jan 2010 | 03 May 2009 | 5-Yr Avg |
| Gauge Score (0 to 100) | 22 | 21 | 28 | 30 |
The Growth and Profitability gauges improved modestly, but the Value gauge kept the Overall Gauge in check. The lower share price caused by the recent market skid may be what the gauge needs to move higher later this year.
Full disclosure: Long HD at time of writing.
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