09 September 2009

HD: Financial Gauge Analysis (Update) for the July 2009 Quarter

We previously posted The Home Depot's (NYSE: HD) preliminary Financial Gauge scores for the July quarter, which actually ended 2 August 2009.

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:

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 Management2 Aug 20093 May 20093 Aug 20085-Yr Avg
Current Ratio1.
Debt/CFO (years)
Inventory/CGS (days)
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)
Working Capital/Invested Capital14.6%10.2%10.9%11.2%
Cash Conversion Cycle Time (days)44.842.741.042.2
Gauge Score (0 to 25)6765

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.

Growth2 Aug 20093 May 20093 Aug 20085-Yr Avg
Revenue growth-10.4%-9.3%-2.9%-2.8%
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)3004
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.  The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

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.

Profitability2 Aug 20093 May 20093 Aug 20085-Yr Avg
Operating Expenses/Revenue92.7%92.6%91.6%90.2%
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)9889

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.

Value2 Aug 20093 May 20093 Aug 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO) 10.110.410.311.9
Gauge Score (0 to 25)87159

Reducing the EV/CFO from 10.4 to 10.1 added one point to the score.

Overall2 Aug 20093 May 20093 Aug 20085-Yr Avg
Gauge Score (0 to 100)29273830

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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