Home Depot Inc. Harvard Case Solution & Analysis

Home Depot Inc.

Introduction:

The company Home Depot Inc. is known to be the largest retailer of products in home improvement and known to be the third largest firm in the US that was established in 1978 and located in Atlanta, Georgia. The company is known to be a leader in do-it-yourself market all over in US. The company has big warehouses to store the products and because of its large warehousing facility; the company was able to sell its products in large volume at low prices. With the help of warehousing facility, Home Depot successfully implemented low prices along with high service.

 

Analyzing the financial and operating performance of the company, the company was performing extremely well during the decade of 90s. In addition to that, the company’s EPS and the price of stock had risen spectacularly over the last ten years. By the end of 90s, the company had become the market leader in the home improvement market of the country. With this success, the company was planning to grow its business by adding more stores in different locations.

The industry in which the Home depot Inc. operated is known to be a growing industry which cannot be easily impacted by the ups and downs in the economy. In the home improvement industry, several competitors were operating but being the leader in the market, Home Depot occupied the largest market share among them.

Moreover, the company had taken several initiatives to boost the growth and market share of the company such as changing the formats of stores, going after professional customers, development of business on internet and addition on its store line. The initiatives were profitable but risky as well.

Current situation

From the news published on October 12th 2000, the company had announced a decrease in its earnings per share and as a result of this announcement, the stock price of the company decreased to 28% which caused a decline in the market value by $33 billion. As Home Depot was the leader in the market therefore; decrease in the market share resulted in price decline of other competitors as well.

Although the economy of US was on continuous growth but, from June 1999 to May 2000, the federal increased the interest rate to 1.75%. The company was not free from the risk of recession but the nature of the business makes it less vulnerable to the volatility in the economy.

The decrease in the prices of stock was basically thought as the consequence of moderating economy but the way of the business and development activities attempted; it was not clear whether the marvel was fundamentally because of abating economy, a response to overvaluation of the stock or an impression of conceivable issues in relation to the organization's strategy for future.

Analysis:

Economic analysis:

Budgetary analysis is carried out to discover the general impacts of total economy or market that can essentially affect the returns of a one stock. Studies have discovered a relationship between total prices of the stock and different financial series, for example, wage swelling, employment or production. Consequently when evaluating the future worth of a security, it is important to break down the viewpoint for the total economy. For the economic analysis of Home Depot Inc., analysis of US economy and the home improvement market has been done.

Economy in United States:

As mentioned above the US economy was at its boom in the 90s decade however, in 2000, the Federal Reserve raised the interest rates to 1.75%. The reason behind this rise in interest rate was to slow down the economy. This strategy worked and decline in the overall consumer demand was found.

The Home Improvement Market:

Since 1981 till now, the home change industry in the US had developed at a yearly rate of about 6%, or somewhat slower than the US economy. In any case, with the desire of some decrease in the economy, economists anticipate a normal ostensible development in the business.

Throughout the late years, a few elements for example, low investment rate, high turnover in housing, rise in home proprietorship, and builds in disposable income has helped the industry to develop at a good rate. Anyhow from 1994 to 1995, mortgage loan investment rates for 30 year’s bond expanded by a normal of 24%. In 2000, they had moved to 8.6%, preceding falling a bit underneath 8% in the fall. Since Home Depot Inc. has developed to involve a vast portion of the market sector, these macroeconomic progressions are going to have far more excellent effect on them.

Value of stocks, inflation along with interest rates:

Even though, the linkage between interest rates, values of stocks and inflation is not very strong but there is a strong link between the cash flows of the company and the inflation and interest rate in the economy. The earnings of the company are expected to increase when there is a rise in inflation rate along with the rise in interest rate. In such circumstances, the stock prices of the company can be constant because of the fact that increase in the required rate of return can be balanced through an increase in growth which indicates that the stock return will increase along with a rise in inflation rates.

Industry Analysis:

Analysis for the industry is carried out in light of the fact that it decides a level of risks that a company can face because of sales unpredictability and working influence and its benefit is affected by focused environment in the business. Home Depot Inc. is in an industry which is not helpless to business cycle and comprises of numerous other focused home improvement firms. The real players in the home change industry for this situation are portrayed in the contender's analysis.

Major Competitors:

Home Depot Inc.:

Home Depot is the biggest retailer of home improvement items and third biggest retailer of any kind in the United States. Home Depot had skills that not many different retailers had and was a standout amongst the best retailers in American history. This organization opened stores holding a tremendous collection of building materials and items related to home improvements and that focused on distinctive home holders and contractors who work on a small level. The stores were warehouses and they sold huge volumes of products at low costs and they additionally gave proficient services to clients. By 1999, Home Depot became the biggest home improvement retailer with a 24 percent share in the market. In addition to that, the company operated nearly 930 stores with around 21% to 22% growth in.................

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Home Depot, founded in 1978, pioneered the concept store retail industry center of the house. A niche strategy has led to rapid growth in sales. By 1986, however, the company began to experience deteriorating profitability. Students were asked to analyze the company's performance by analyzing the ratio of growth and sustainable basis, and to recommend a plan of action. "Hide
by Krishna G. Palepu Source: Harvard Business School 24 pages. Publication Date: April 25, 1988. Prod. #: 188148-PDF-ENG

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