Home Depot Finance Case

II. Background Information

The Home Depot Inc. was founded in 1978 and is the world’s largest home improvement retailer and the second largest retailer in the United States. The sales for the fiscal year 2000 were $45.7 billion, compared to $38.4 billion in fiscal 1999. As of January 2001, the company was operating 1,134 retail stores in forty-seven states, six Canadian provinces, Puerto Rico, Chile and Argentina.

Home Depot stores sell a wide assortment of building materials, home improvement and garden products. Twenty-six EXPO Design Center stores sell products and services primarily for design and renovation projects. Additionally, the company operates four Villager’s Hardware test stores, which offer products for home enhancement and small projects. In mid-year, Home Depot also launched a Home Depot Floor Store, located in Plano, Texas.

Home Depot stores serve three primary customer groups: do-it-yourself (D-I-Y) customers, who are typically homeowners that purchase products and complete their own projects and installations; buy-it-yourself (B-I-Y) customers, who are typically homeowners that purchase materials themselves and hire third parties to complete the project and/or installation; and professional customers, who are professional repair re-modelers, general contractors and tradesmen.

The Company also offers products through two direct marketing subsidiaries: Maintenance Warehouse and National Blinds and Wallpaper. The Maintenance Warehouse subsidiary is one of the leading mail marketers of maintenance, repair and operations products serving primarily the multi-family housing and lodging facilities management market. The company’s National Blinds and Wallpaper subsidiary is a telephone mail order service for wall...

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...ment in Property and Equipment Was a Second Reason for the Company’s Cash Deficit:

¬ In 1985, the Company’s Expansion Required an Investment of $90m;

¬ Since the Company’s Operations Generated Negative Cash Flow, this Investment Had to Be Funded through External Sources;

• Most of the Company’s Cash Needs Are Financed through Long-Term Debt:

¬ In 1984, the Company Borrowed $120m, and an Additional $92m Was Borrowed in 1985;

¬ The Company Used Convertible Debt in Both Years, which Is Unlikely to Get Converted into Equity Any Time Soon;

• In Contrast to the Home Depot, Hechinger Had a Positive Cash Flow from Operations in Each of the Three Years;

• Hechinger Did Not Rely on Debt Financing but Used Equity Financing to Fund its Capital Expansion;

• Hence Hechinger’s Debt-Equity Ratio in 1985 Was only 1.2 while the Home Depot Has a Debt-Equity Ratio of 2.7;