Holli Severance
Acct 2301
28 April 2013
Annual Report Project:
The Home Depot, INC and Subsidiaries
Introduction
Home Depot’s CEO is Francis S. Blake

Home Depot’s corporate headquarters is located in Atlanta, Georgia

Financial reports for the fiscal year ended January 29, 2012

Home Depot’s inventory includes a wide range of building and home
improvement materials, lawn and garden products, as well as a tool rental
facility for “do it yourself” projects

The main geographic activity is the US and US territories (with greater
store #s in CA, FL, and TX)

Home Depot’s internal account auditors are as follows:
F. Duane Ackerman
Ari Bousbib
Gregory A. Brenneman
J. Frank Brown

Home Depot’s financial statements are independently audited by the
registered public accounting firm of KPMG LLP

According to KPMG LLP, Home Depot represented its company well with its
reporting in the financial statements. The information reported was in
accordance with GAAP and suggests a well ran corporation with promise.
KPMG LLP gave an unqualified, or “clean” opinion of The Home Depot’s
financial statements.

The financial statements are not the responsibility of the independent
accountants; their responsibility is to review the statements and simply yield
an opinion.

The responsibility of preparing the financial statements lies in the hands of
Home Depot’s internal auditing group, listed above, and signed off by the
CEO.

Dividends= $1.08/share

Home Depot stock is traded on the New York Stock Exchange

The ticker symbol for Home Depot is HD

Home Depot shares are currently trading for $51.95
Industry Situation and Company PlansThe Home Depot’s number one priority as a corporation, according to CEO, Francis
Blake is customer service. Over time, the company has increased the number of
customer service associates on the floor, standing at 51%, with plans to increase
even more to 60% by year-end 2013. In addition to in-store service upgrades, they
have improved the user-friendliness of their website by reducing click numbers,
with hopes of making merchandise a quick find and the site as a whole more easy to
navigate. Home Depot has also implemented a “BOPIS” program where customers
can shop and purchase merchandise online and pick it up from a store near them.
Mr. Blake addressed the companies’ desire to, “remain committed to our
interconnected retail strategy of leveraging our e-commerce business to drive
transactions across all channels.” Other improvements include digitizing their
special order catalogues having made vast upgrades to their special order system, of
which they currently are through 40% of the incremental upgrades to the program.
Home Depot also has allocated a huge profit margin toward repurchase of shares.
$3.5 billion was spent on share buybacks in 2011 with the plan of spending another
$6.4 billion on outstanding shares by end of fiscal year 2013. Blake markets that a,
“solid dividend, coupled with prudent use of cash, will create the most value for all
stakeholders” and will keep investors satisfied and Home Depot in a good financial
position.
Financial Statements- (all amounts given in millions)
Income Statement:

The I/S most resembles that of a multi-step format

Gross Profit 2010- $23,304
Gross Profit 2011- $24,262
Income from Operations 2010- $5,839
Income from Operations 2011- $6,661
Net Income 2010- $3,338
Net Income 2011- $3,883
The figures are increasing in all categories from the previous year. A positive
trend says business is good!!
Balance Sheet:

Assets = Liabilities + Stockholders’ Equity
2010- $40,125 = $21,236 + $18,889… ($40,125)
2011- $40,518 = $22,620 + $17,898… ($40,518)
Statement of Cash Flows:

Operating cash flows have been more than net income for 2010 and 2011.
2010- NI=$3,338 O=$4,585 (O>NI by $1,247)
2011- NI=$3,883 O=$6,651 (O>NI by $2,768)

Capital Expenditures are Home Depot’s main investing activity.

Proceeds from long-term lending are Home Depot’s highest source of
financing.

In 2010, cash decreased by $876 from $1,421 to $545.

In 2011, cash increased by $1,442 from $545 to $1,987.
Accounting Policies
Revenue Recognition- Home Depot is strictly run on accrual basis,
recognizing revenue “at the time the customer takes possession of the
merchandise.” Because there is no way of knowing how much of that
revenue is going to be returned, the company tries to estimate returns based
on the history of returns in previous years. If Home Depot receives payment
before store items are in customers’ possession, the revenue is recorded as a
deferred revenue on the balance sheet. This is the method done fore the sale
of gift cards as well and is only recognized upon redemption in net sales.
Merchandise inventories- Home Depot uses the FIFO method for its
inventory. “The Company evaluates the inventory valued using a cost method
at the end of each quarter to ensure that it is carried at the lower of cost or
market,” and an actual physical inventory count is taken regularly to ensure
the amounts reflect tangibly what is recorded in the financials. Estimates are
made to account for shrinkage at each store based on history and its
geographic location between independent physical inventory counts.
Depreciation- Home Depot’s assets are depreciated and amortized using the
straight-line method. The company estimates its buildings and leasehold
improvements to have a useful life of 45 years, while estimating the
furniture, fixtures, and equipment to be useful for a life of 20 years.

Other Accounting Policies- Accounts receivable, cash equivalencies, income
taxes, prepaid advertising, vendor allowances, intangible assets, and stockbased compensation.

No. Reading the accounting policies only reaffirms my opinion of the
company and the way things are handled financially. The organization it
takes to run a corporation so large is unimaginable, and I am impressed that
so many details, including foreign currency exchange and vendor allowances,
are noted and accounted for to all public spectators of interest.
Ratio Analysis


Tests of Liquidity:
Current ratio= Current Assets/Current Liabilities- $14,520/$9,376= 1.55
Quick ratio= (Cash + Short-term investments + Net current
receivables)/Current Liabilities- ($1,987+$1,245)/$9,376= .34
Asset Management:
Inventory turnover=Cost of Goods Sold/Average invertory$46,133/($10,325+$10625)/2= 4.40




Accounts Receivable turnover= Net sales/Average net accounts receivable$70,395/($1,245+$1,085)/2= 60.42
Tests of Solvency and Equity Position:
Debt ratio= Total liabilities/Total assets- $22,620/$40,518= .56
Times interest earned ratio= Operating income/Interest expense$6,661/$606= 11.0
Tests of Profitability:
Return on Net Sales=Net income/Net sales x 100- $3,883/$70,395 x 100=
5.52%

Return on Total Assets= (Net income + Interest expense)/Average total
assests x 100- ($3,883+$606)/($40,518+$40,125)/2 x 100= 11.1%

Return on common Stockkholders’ Equity= (Net income-Preferred
dividends)/Average common stockholders’ equity x 100($3,883-$0)/($17,898+$18,889)/2 X 100= 21.1%

Earnings per share of Common Stock= (Net income-Preferred
dividends)/# of shares outstanding- ($3.883-$0)/($1.537+$1.623)/2
shares= $2.46/share


Market Analysis:
Price/earnings ratio= Market Price per share/Earnings per share$51.95/$2.46= $21.18
Dividend yield ratio= Dividend per share/Market price per share x 100$1.08/$51.95= 2.08%
ConclusionOne would think, especially being a homeowner with a closely neighboring
Home Depot down the street where I consistently am spending money, that I would
not hesitate at the chance to buy stock in the leading merchandiser of home
improvement sales. After some research, it is obvious that Home Depot is a “welloiled machine”, but investing in the company would depend on if I were looking for
a long-term safe investment or a higher risk short-term investment.
I believe as a short-term investment, Home Depot would not be the best
company to purchase stock. In this economy, people are getting laid off,
foreclosures are on the rise, and it doesn’t seem the right time in most individual’s
opinion to be completing major home renovation projects. According to financial
analysts at Forbes, “deterioration in the housing market could negatively impact
demand for HD's products/services, particularly those driven by housing turnover
activity.”
Another concern for the short-term investment of Home Depot stock lies in
the fact that a large percentage of sales are done through the use of a Home Depot
credit card. Many times when people do large home improvement projects, they
either finance them using a credit card similar to a department store, or they take
out home equity or home improvement loans. Lenders are tightening the
requirements for approval of financing, not only mortgage lenders for home loans
but lenders for smaller purchases to financing and credit card customers. In the
financial statements, Home Depot discloses that nearly 22% of net sales are through
account receivables. If one fifth of the company’s revenue stems from customers
being approved for a Home Depot credit card, using it for purchases and actually
paying their bill when it comes due with the money they are getting from
unemployment, then for the short-term, I’m not willing to take a gamble buying
Home Depot stock.
However, for a long-term investment, Home Depot’s history, future business
plans, and financial statements lead me to believe the company is consistently
growing and will be dependable for years to come. Their current ratio is 1.55, a low
risk, as a good current ratio for most companies is 1.5. Home Depot’s debt ratio sits
at a 5.6 when the average debt ratio for most companies ranges from .57 to .67. If
Home Depot’s business started to slump, they can afford to take on more debt if
need be to save the company.
As addressed in the president’s note, Home Depot’s main priorities are
customer service and keeping their investors appeased. The history of the company
shows they pay out dividends to shareholders quite regularly with the last one being
December 2011. The company also has plans of spending $6.4 billion dollars in
stock buybacks by 2013.
Home Depot shows promised growth as it expands internationally, as well as
making online improvements for their customer’s convenience of online shopping
and product special ordering. They are keeping up with the world of technology and
communication through social network sites like Facebook and Twitter, as well as
video streaming “how to” videos on Youtube, providing customers with the
confidence to begin “do it yourself” projects, which ultimately encourages
consumers to go buy needed supplies for those projects at their neighborhood
Home Depot.
Forbes sums it up best by saying even though the economy does not look
promising, “home improvement is one of the best businesses in retail, given the lack
of serious competitive threats, the importance of home to a typical consumer, and
market share consolidation among HD and LOW,” gives us confidence that long-term
investment of Home Depot stock is safe and promises to be a good return on
investment. Considering the amount of money I spend there on a regular basis, it’s a
nice thought that I have the ability to have some of my money returned in proceeds
from investing in a company I use and believe in along with many other consumers.
http://finapps.forbes.com/finapps/BuyHoldSellAnalysis.do?tkr=HD
http://www.reuters.com/finance/stocks/HD.N/key-developments
http://www.homedepot.com/
http://phx.corporate-ir.net/phoenix.zhtml?c=63646&p=irol-reportscurrent