Look at the page following the financial statements titled “Selected Financial Data.” Note that fiscal 1985 ends on February 2, 1986, and there is a typographical error in the case. That is, the first column of data is for February 2, 1986 – NOT 1985. Graph Home Depot's performance in the following areas. Provide a brief, 1-3 sentence evaluation of each area.
* Growth in Sales
* Growth in Total Assets
* Change in Net Income
* Growth in Long-term Debt
Sales nearly doubled each year, indicating significant growth during this time due to the aggressive expansion.
Total Assets Growth:
The amount of assets increased each year from ...view middle of the document...
Compare fiscal 1985 to fiscal 1983. Which individual income statement categories are most responsible for return the decrease in return on sales from 4.0 percent to 1.2 percent? What factors might explain the individual category changes from 1983 to 1985? Remember that these are changes in percentage of sales, not in absolute amount. (1/2 page single-spaced)
The income statement categories which are most responsible for the decrease in the return on sales are gross profit, selling and store operating expenses, and interest expense. The income statement categories contributed 1.4%, 2.2%, and 1.4%, respectively, to the overall decrease. The decrease in the gross profit as a percentage of sales is a function of revenues and cost of merchandise sold. The cost of merchandise sold increased as The Home Depot established their market presence in new markets. Inventory cost control could be a factor as the rapid growth in business impacted the efficiency of their supply chain management. Additionally, it is likely that The Home Depot continued to sell a high proportion of promoted merchandise in their new stores which would decrease the gross profit percentage. The selling and store operating expenses increased due to The Home Depot’s expansion which included higher costs from their Bowater Home Center stores. New stores have certain fixed and minimum operating costs while the established stores are growing revenues. This caused an increase in the percentage of expenses against sales. The increased interest expense is also attributed to The Home Depot’s growing business since the expansion funding was accomplished through the issuance of new debt. A final factor contributing to the overall decrease in the return on sales is the drop in the average amount of sales per transactions. This had a direct impact on revenues which led to costs being a higher percentage of such revenues.
Look at Exhibit A (page 2 of these case questions).
a) Why is Home Depot's cash flow from operations negative? (1-3 sentences)
b) Where has Home Depot been getting the money to finance acquisition of stores? (1-3 sentences)
c) What would happen to Home Depot if the cash flows for operating, investing, and financing activities for fiscal 1986 (year ending February 1987) were to be exactly the same as for fiscal 1985? (1 sentence).
a) The Home Depot had significant increases in inventory and receivables due to their exponential growth from 1984-1986. The increases in both of these items are the main reasons they have a negative cash flow from operations as the sales from new stores are growing.
b) The Home Depot has been increasing their long-term debt to finance their acquisition of stores. The amount of long-term debt especially increased in 1985 and 1986.
c) The Home Depot had $9.7 million of cash at the end of Fiscal Year 1985. If they had the same cash flow in Fiscal Year 1986 as Fiscal Year...