Value Line Publishing 2002 Essay

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This case study highlighted the retail building supply industry in the US while pointing out Home Depot and Lowe as market leaders in the respective industry. Different analysts shared different views however everyone agreed that competition between the two would be beneficial to the industry. Both now rely heavily on in-store display strategies as opposed to the online retail method. Analysis According to Exhibit 7, the performance of Home Depot is slightly improving over the years. Although the Gross Margin of the company has increased consistently over the past 5 years, the Operating Margin of the company has experienced a minor decrease since 1999, dropping from 9.9% to 9.2%. This decrease of Operating Margin in the past two years can be blamed on the increase in Operating Expenses which is evident from an increase in the Cash Operating Expenses Ration (OER) since 1998. On the other hand, Lowe’s performance as compared to Home Depot’s is not only better but also consistent. The Gross Margin, Operating Margin and NOPAT Margin are all increasing consistently, but slowly, over the past 5 years in consideration. The return on capital for Lowe has slowed down in the last 3 years and has fallen down from 1998 to 2000 from 10.6% to 9.8%, but is reaching recovery in 2001. The return on equity is also behaving similarly. Home Depot on the other hand is facing a consistent but slow decrease in profitability. A comparison of leverage shows that Home Depot is becoming less leveraged over the years while Lowe is becoming more leverage. The capital turnover figures for Home Depot have increased in the first 3 years but decline in the final two years, whereas for Lowe it’s a different case. The total capital turnover for Lowe has decreased from 2.6 to 2 over the course of 5 years. From the sensitivity analysis in Exhibit 13 we can observe that the ROC is not heavily

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