In a previous article, we examined The Home Depot's (NYSE: HD) Income Statement for the third quarter of fiscal 2009 and compared the entries on each line to our "look-ahead" estimates. Earnings in this period, which ended 1 November, fell from $0.45 to $0.41 per share.Using the financial statements in the earnings announcement and the more detailed 10-Q, we have now updated our usual set of Cash Management, Growth, Profitability and Value metrics. This post reports on the metrics and the associated financial gauge scores.
Home Depot is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products. Some 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: 6 of 25 (unchanged from July)
- Growth: 1 of 25 (down from 3)
- Profitability: 11 of 25 (up from 9)
- Value: 6 of 25 (down from 7)
- Overall: 29 of 100 (up from 27)
Because Home Depot restructured substantially in 2007, the validity of comparisons of data from different time frames is less than for companies that did not change materially.
| Cash Management | 01Nov 2009 | 02Aug 2009 | 02Nov 2008 | 5-Yr Avg |
| Current Ratio | 1.3 | 1.3 | 1.2 | 1.2 |
| LTD/Equity | 44.7% | 50.4% | 56.3% | 38.6% |
| Debt/CFO (years) | 1.9 | 2.2 | 2.1 | 1.5 |
| Inventory/CGS (days) | 92.5 | 92.2 | 89.9 | 86.7 |
| Finished Goods/Inventory | N/A | N/A | N/A | N/A |
| Days of Sales Outstanding (days) | 6.8 | 7.0 | 7.3 | 9.9 |
| Working Capital/Invested Capital | 12.7% | 14.6% | 9.4% | 10.9% |
| Cash Conversion Cycle Time (days) | 47.6 | 46.4 | 44.5 | 43.1 |
| Gauge Score (0 to 25) | 6 | 6 | 10 | 6 |
Home Depot used cash from operations to cut its Long-term Debt from $10.35 billion to $8.66 billion, a reduction of about $1.7 billion, in the last 12 months. Since short-term obligations increased by about $700 million, the reduction in total debt was $1.0 billion.
In the last year, Working Capital has grown from $2.7 billion to $3.4 billion. The $700 million rise is the result of a $300 million increase in Current Assets and a $400 million decrease in Current Liabilities. It's interesting that Current Liabilities were reduced even though the short-term debt component, as mentioned above, increased.
The $10.8 billion in Inventory held is significantly below last year's $11.9 billion. When we adjust for lower Revenues and costs, days of Inventory actually edged up. This is one reason the Cash Conversion Cycle Time lengthened. Falling Revenues tends to degrade the efficiency metrics.
| Growth | 01Nov 2009 | 02Aug 2009 | 02Nov 2008 | 5-Yr Avg |
| Revenue growth | -10.9% | -10.4% | -3.6% | -4.0% |
| Revenue/Assets | 151.8% | 151.8% | 165.8% | 165.7% |
| Operating Profit growth | -19.3% | -20.1% | -11.6% | -12.9% |
| CFO growth | 0.7% | 4.6% | -19.0% | 15.2% |
| Net Income growth | -22.4% | -27.8% | -31.8% | -17.2% |
| Gauge Score (0 to 25) | 1 | 3 | 0 | 3 |
Trailing-year Revenue continued to fall, although the rate of decline in the last three quarters wasn't as severe as in the final quarter of fiscal 2008.
Large special charges have had a very significant effect on Net Income in each of the last two years.
The only metric above to show positive growth in the last four quarters, albeit slight, is Cash Flow from Operations. Lower impairment and depreciation charges appear to have helped.
| Profitability | 01Nov 2009 | 02Aug 2009 | 02Nov 2008 | 5-Yr Avg |
| Operating Expenses/Revenue | 92.6% | 92.7% | 92.1% | 90.4% |
| ROIC | 11.4% | 11.5% | 12.9% | 16.0% |
| Free Cash Flow/Invested Capital | 15.7% | 13.9% | 10.0% | 10.9% |
| Accrual Ratio | -5.5% | -4.0% | -0.4% | -0.1% |
| Gauge Score (0 to 25) | 11 | 9 | 7 | 9 |
The Operating Expense ratio, which excludes special charges, has been relative stable for the last year. Since Revenue is down fairly significantly, this indicates that the company has had some success cutting its expenses proportionately.
While there has been some degradation in the Return on Invested Capital, the figure has held up better than we might have expected in the current difficult retailing environment.
Free Cash Flow has improved significantly because Home Depot has slashed capital spending. Because Cash Flow is holding up better the Net Income, the Accrual Ratio is signifying better earnings quality. Restructuring charges have, however, muddied the waters.
| Value | 01Nov 2009 | 02Aug 2009 | 02Nov 2008 | 5-Yr Avg |
| P/E | 18.8 | 18.8 | 13.3 | 14.7 |
| P/E vs. S&P 500 P/E | 0.9 | 0.9 | 0.9 | 0.9 |
| PEG | N/A | N/A | N/A | 1.2 |
| Price/Revenue | 0.6 | 0.6 | 0.5 | 0.8 |
| Enterprise Value/Cash Flow (EV/CFO) | 9.3 | 10.1 | 9.4 | 11.1 |
| Gauge Score (0 to 25) | 6 | 7 | 12 | 8 |
| Share Price ($) | $25.09 | $25.94 | $23.59 | - |
When compared to last year, Home Depot shares rose in price but the company's earnings fell. This expanded the P/E multiple, which put downward pressure on the Value gauge score. However, this expansion was consistent with the growth in the multiple for the overall market.
PEG doesn't apply when earnings growth is negative.
| Overall | 01Nov 2009 | 02Aug 2009 | 02Nov 2008 | 5-Yr Avg |
| Gauge Score (0 to 100) | 29 | 27 | 36 | 30 |
The gauges held their ground in the third fiscal quarter, but the score remains low. The Profitability gauge did best in the recent period.
Full disclosure: Long HD at time of writing.
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