Significant internal events affecting cash position

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Reference no: EM1361655

At one time many customers turned to Sears for home improvement projects. As the economy boomed many warehouse stores began to open their doors. Today, Lowe's and Home Depot are two well-known companies that exist within the United States. Both companies are ranked in the top five companies in the home improvement industry. If one was a manager at Lowe's, would he or she be interested in knowing the relative profitability of Home Depot operations?
This paper will provide a brief overview of Lowe's and Home Depot. After reading, one will be able to gain valuable knowledge of both organizations.
Company's Product
The Home Depot is an American retailer of construction and home improvement products. Home Depot is the largest retailer of home improvement products, providing a wide variety of goods and services for professionals and do-it-yourself consumers. Home Depot is committed to buying only wood products that have come from forests managed in a responsible way. "In recent years, as the world's largest seller of certified wood products, The Home Depot has helped to assist in monitoring of sustainable wood harvesting throughout the world" (Home Depot, n.d.). Today, The Home Depot offers approximately 40,000 products.
Lowe's Home Improvement Warehouse is a United States based chain of retail home improvement products and appliance stores. Lowe's believes building starts with the wood. For home improvement projects Lowe's offer both hardwoods and softwoods. Lowe's believes that only about 100 out of over 1,000 species of trees should be used for manufacturing and constructing wood products.
Company Established
Bernie Marcus and Arthur Blank opened the first Home Depot in Atlanta, Georgia on June 22, 1979 (The Home Depot, n.d.). "The Home Depot story began as a vision of warehouse stores filled from floor to ceiling with a wide assortment of products at the lowest prices" (The Home Depot, n.d.). The organization currently has more than 2,100 stores throughout the United States, Mexico, and Canada.
Lowe's has played a role in the history of home improvement since the organization was founded in 1946 in North Wilkesboro, North Carolina. The organization began as a single neighborhood hardware store; the chain now operates over 1,375 stores in 49 states (Lowe's, n.d.) Currently, Lowe's is in its 60th year of improving home improvement.
Accounting Firm
The integrity of financial reporting of publicly traded companies protects the foundation of the United States securities market in which both Lowe's and Home Depot's stock and other securities are traded. To ensure this integrity is upheld, both Lowe's and Home Depot enlist their own internal or independent auditors. The companies audit their financial statements and financial reports using their own internal auditors. Both companies also enlist the assistance of external auditors or auditing firms to assure the integrity of their financial reporting. Lowe's currently enlists the help of the Deloitte & Touche USA LLP auditing firm (Shareholder.com, N.D.). Home Depot enlists the help of KPMG LLP firm as their external auditors (Home Depot, n.d.). Both companies require cooperation and open communication with their internal and external auditors to ensure the integrity of their financial reporting to the Securities and Exchange Commission (SEC) as well as the New York Stock Exchange (NYSE).
Financial Data
Financial statements are most important statements of accounting. Accountants summarize this information in a balance sheet, income statement, and statement of cash flows. The statement of cash flows provides information about cash receipts and cash payments of an entity during a period. A secondary objective is to provide information about the operating investing and financing activities of the entity during the period.
We know a great deal about the company that is valuable by assessing its future cash flows. Balance sheet contains Assets and Liabilities as it gives the snapshot of the organization. Income statement contains all the revenues and expenses and finally they determine the profitability of the organization. Cash flow statement determines the cash flow position of the organization. As the balance sheet, income statement, and statement of cash flows are derived from the same underlying financial information, they are said to "articulate," meaning that they relate closely to each other. Balance sheet portrays the picture of the organization on a particular date. Income statement discloses the performance of the organization. It tells about the profitability of the organization. Thus, financial statements are useful tools for evaluating both profitability and liquidity. Used separately, or in combination, the income statement, cash flow statement, and balance sheet help interested parties to measure a company's current financial performance, and to forecast its profit and cash flow potential.
Case of Home Depot
Founded in 1978, The Home Depot (Retail) is the world's largest home improvement specialty retailer and the second largest retailer in the United States, with fiscal 2005 sales of $81.5 billion, 345,000 is employed, and there is approximately 2,056 stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, 10 Canadian provinces, and Mexico. Through its Home Depot Supply Division, the company operates one of the nation's largest diversified wholesale distributors, with operations in 41 states and Canada. FORTUNE magazine has recognized Home Depot as the No. 1 most admired specialty retailer and the No.13 Most Admired Corporation in America for 2006. The financial highlights are given as follows:

Source Home Depot: Annual report, 2005.

According to the income statement, the profitability of the Home depot is healthy, it has increase to the $5.8 bn in 2005, and Sales have grown to $81.5 bn.
The Balance sheet provides details of liabilities and assets. Assets have grown to $44.5 bn as on 29th of January 2006 from $34.4 as on Feb1, 2004. Out of this, current assets are $15 bn. Total shareholder's equity is at $26bn. The position of cash flow is strong as the operating cash flows are very high and more than $6.4 bn. Cash used by financing activities and investing activities are $1.6bn and $4.5 bn respectively. Other key features given in the footnotes are:
1. Business, Consolidation, and Presentation
The Home Depot, Inc. and subsidiaries (the ''Company'') operate The Home Depot stores, which are full-service, warehouse-style stores averaging approximately 105,000 square feet in size. At the end of fiscal 2005, the Company was operating 2,042 stores in total, which included 1,793 The Home Depot stores, 34 EXPO Design Center stores, 11 materials to construction contractors. The Consolidated Financial Statements include the accounts of the Company and the wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The Company's fiscal year is a 52 or 53-week period ending on the Sunday nearest to January 31.
2. Comprehensive Income
Comprehensive Income includes Net Earnings adjusted for certain revenues, expenses, gains and losses that are excluded from Net Earnings under generally accepted accounting principles. Adjustments to Net Earnings are primarily for foreign currency translation adjustments.
(Adapted from the Annual report of Home Depot, 2005)
Note: The key financial statements are attached in the excel file
Case of Lowe's Companies Inc.
Lowe's Companies, Inc. are also one of the largest home improvement retailers. Its products include home decorating, maintenance, repair, and remodeling and property maintenance. Its customers include retail do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers, who utilize the Company's installation services, and commercial business customers. As of February 3, 2006, the Company operated 1,234 stores in 49 states, with 140 million square feet of retail selling space. (https://moneycentral.msn.com/companyreport?Symbol=LOW)

According to the income statement the profitability of the Lowe's is healthy and it has increase to the $2.7 bn in 2005 and also Sales have grown to $43.2 bn.
The Balance sheet provides details of liabilities and assets. Assets have grown to $44.5 bn as on 29th of January 2006 from $24.4 as on Feb1, 2004. Current assets are $7.8 bn. Total shareholder's equity is $14.3 bn. The position of cash flow is strong as the operating cash flows are strong and at $3.8 bn. Cash used by financing activities, investing activities are $.275 bn, and $3.6 bn respectively. Other key features given in the footnotes are:
Lowe's Companies, Inc. and subsidiaries (the Company) is the world's second
largest home improvement retailer and operated 1,234 stores in 49 states at February 3, 2006. The Company's fiscal year ends on the Friday nearest the end of January. The fiscal year ended February 3, 2006 had 53 weeks. The fiscal years ended January 28, 2005 and January 30, 2004 had 52 weeks. The consolidated financial statements include the accounts of the Company and its operating subsidiaries, of which are wholly owned. All material intercompany accounts and transactions have been eliminated. The preparation of the Company's financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, sales, and expenses and related disclosures of contingent assets and liabilities. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. (Adapted from the Annual report of Lowe's, 2005)
Note: The key financial statements are attached in the excel file

Comparisons of Home Depot and Lowe's

HD LOW Pvt1 Pvt2 Industry
Market Cap: 73.32B 23.48B N/A N/A 6.21B
Employ­ees: 234,600 144,000 350,001 28,001 21.00K
Qtrly Rev Growth (yoy): 13.10% 20.30% N/A N/A 18.60%
Revenue (ttm): 84.00B 45.25B 6.50B1 2.04B1 3.22B
Gross Margin (ttm): 33.54% 34.41% N/A N/A 33.54%
EBITDA (ttm): 11.45B 6.17B N/A N/A 315.63M
Oper Margins (ttm): 11.62% 11.23% N/A N/A 11.29%
Net Income (ttm): 6.08B 3.03B N/A 47.60M1 177.64M
EPS (ttm): 2.846 3.791 N/A N/A 2.85
P/E (ttm): 12.46 7.99 N/A N/A 8.02
PEG (5 yr expected): 0.8 0.75 N/A N/A 0.75
P/S (ttm): 0.87 0.52 N/A N/A 0.88

LOW = Lowe's Companies Inc.
Pvt1 = Menard, Inc. (privately held)
Pvt2 = True Value Company (privately held)
Industry = Home Improvement Stores

(Adapted from yahoo finance)

Home Depot is ahead in terms of Sales, Market cap, Net Income. Lowe has better gross

margin.

MD&A
On Friday, March 31, 2006 the Financial Accounting Standards Board issued a proposal that would require employers to recognize over funded or under funded positions of defined benefit retirement plans, including pensions in their balance sheets. The proposal would also require the measurement of the plans assets and obligations as of the date on their financial statements. The purpose of the proposal is to increase the transparency of financial statements for creditors, shareholders, retirees, employees, donors, and any other users. This proposal affects all industries as it ensures that all stakeholders of an organization are aware of whether the organization is capable of fulfilling the obligation to retirement and pension plans in the future. The positive aspect of this proposal is that it will be very obvious to stakeholders of the organizations longevity (SmartPros, April 2006).

Reference no: EM1361655

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