16 September 2010

HD: Financial Gauge Analysis for the July 2010 Quarter

The Home Depot, Inc. (NYSE: HD) earned $0.72 per diluted share on a GAAP basis in fiscal 2010's second quarter, which ended on 1 August 2010.  Earnings per share were 8.6 percent more than the $0.66 Home Depot made in the same quarter of 2009.

A previous article examined Home Depot's Income Statement for the latest quarter in some detail.  Reported earnings were $0.01 better than the $0.71 per share we had forecast. 

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.  This post reports on the metrics for Home Depot and the associated financial gauge scores.  The metrics were calculated using data from Home Depot's current and historical financial statements, including those in the latest 10-Q report.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

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:

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 Management01 Aug 201002 May 201002 Aug 20095-Yr Avg
Current Ratio1.
LTD to Equity39.7%39.6%50.4%43.9%
Debt/CFO (years)
Inventory/CGS (days)89.190.592.289.1
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)
Working Capital/Revenue5.0%4.9%4.4%4.4%
Cash Conversion Cycle Time (days)46.646.446.445.3
Gauge Score (0 to 25)7757

The Cash Management gauge score held at 7 points for the third consecutive quarter.  The financial metrics that determine the score barely budged during the latest three-month period.

Home Depot's Long-term Debt has generally been declining for the last few years.  The debt, now $7.7 billion, rose negligibly in the second quarter.  The ratio of Long-term Debt to Equity was steady, and it remains below its five-year average.

Total debt as a percentage of cash flow was almost unchanged.  This parameter hasn't yet fallen below its long-term average.

The 10-Q section on Liquidity and Capital Resources states that Home Depot repaid $1.0 billion in maturing notes after the quarter ended, and the amount will be refinanced in the current quarter.

In the continuation of an encouraging trend, Inventory measured in terms of days of Cost of Goods Sold was three days lower than it was last year.  The reduction in Days of Sales Outstanding is another sign of more efficient use of cash.

Growth01 Aug 201002 May 201002 Aug 20095-Yr Avg
Revenue Growth-0.6%-3.9%-10.4%-4.8%
Operating Profit Growth-10.1%-11.8%-20.1%-12.6%
CFO Growth-0.2%5.5%4.6%6.3%
Net Income Growth21.9%14.6%-27.8%-10.9%
Gauge Score (0 to 25)7833
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.

The Growth gauge score slipped a point, mostly because of lower Cash Flow from Operations.  However, there were positive signs among the other Growth metrics.

The most favorable number above is the 21.9 percent Net Income growth rate.  The rate benefited from special charges in the prior year that made the last four quarters appear comparatively better.  Excluding the charges, which were tied to store closures and exiting businesses, the growth rate was a much more modest 5 percent.

Revenue growth in the last two quarters has been slightly positive, when compared to the same periods of 2009.  Although this performance certainly improved the trailing-year Revenue growth rate from where it was a year ago, the recent results were not quite enough to turn the rate from negative to positive.

The trailing-year growth rate for Cash Flow from Operations fell into negative territory.  Cash Flow in the latest quarter was $1.32 billion, down from $1.60 billion in last year's second quarter.

Profitability01 Aug 201002 May 201002 Aug 20095-Yr Avg
Operating Expense/Revenue92.0%92.3%92.7%90.9%
Free Cash Flow/Invested Capital15.3%16.6%13.9%11.3%
Accrual Ratio-3.1%-4.0%-4.0%-1.5%
Gauge Score (0 to 25)111299

The Profitability gauge score was little changed, with a small decline in the Free Cash Flow ratio responsible for the loss of a point.

The Operating margin, which excludes special charges, has been relatively stable with a slight improving trend.  Nevertheless, the margin remains below (i.e., the expense remains proportionately above) its long-term average.

The story is similar with the Return on Invested Capital.  The ROIC is more profitable than it was a year ago, but it's below the five-year average.

Free Cash Flow has benefited from reduced Capital Spending.  The ratio of FCF to Invested Capital is nicely above its long-term average, but it gave back a percentage point in the last quarter because of weaker Cash Flow from Operations.

The negative Accrual Ratio is actually a favorable result, but it has a greater effect on the gauge score when it is falling.

Value01 Aug 201002 May 201002 Aug 20095-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)10.612.310.110.8
Gauge Score (0 to 25)1088
Share Price ($)$28.51$35.23$25.94-

Home Depot's share price declined 19 percent during the second fiscal quarter, which would normally be enough to lift the Value gauge score substantially.  However, the score was held down by valuation metrics that haven't yet become especially attractive relative to their five-year averages.  A rise in the Value gauge awaits further improvements in sales, cash flow, and earnings.

Overall01 Aug 201002 May 201002 Aug 20095-Yr Avg
Gauge Score (0 to 100)22222830

None of the category gauges changed by more than a point, and what changes there were canceled each other out.  Some positive trends could be seen in the second quarter's results, but further improvements will be needed to boost the Overall gauge.

Full disclosure: Long HD at time of writing.

No comments:

Post a Comment