Cash is King & Depot has all the Jewels

Joined: 14 Nov 2008 Posts: 36

You know, I’ve been reading some more articles lately about customer service, product quality & average register sales in comparing both Home Depot & Lowe’s. ROE metrics don’t tell the story alone, but it’s interesting to note that now from 2004 – 2008 Home Depot has been increasing steadily from just under 20% - 25%. Lowe’s was almost flat line during the period at just under 20% and in 2008 took a 3% dive all of the sudden. If one company is too highly leveraged, then ROE can look good for a long period of time, before finally crashing down and leaving shareholders in the lurch (U.S. Banks and certain homebuilders). Watch out shareholders… If you look at ROA (Return on Assets) provides a reasonable metric of return on every dollar that management invests in the business. Home Depot & Lowe’s were both increasing from 2004 – 2006, but HD was out pacing LOW by 2% points. In 2007, Lowe’s was ahead by .1% at around the 11% mark. In 2009 HD declined to 10% while Lowe’s fell back below 9%. Does that really mean that Home Depot is getting more for every dollar they spend? Do they have better quality inventory items, better customer service or is it just the shear fact that they have more experienced labor, not necessarily more bodies. Another ROE metric which shouts out, is where Home Depot has been further boosting its ROE by levering itself up. You can find yourself in a position of over leveraging yourself, but when you compare leveraging rates over the last 4 years & in that time but specifically during the past 5 quarters, Home Depot has been reducing its interest coverage ratio by 75%. Only in the most recent month has that ratio metric gone back up, but the quarter is not even close to over. This clearly shows that home depot is managing cash, thus having better cash flow to cover debts for fixed obligations (overhead). Lowe’s appears to be doing the opposite, putting itself in debt further to weather the housing and overall market storm. Guess who has more money when the storm is over? That is why at Lowe’s, you’re seeing some of the crazy corporate actions right now with personnel. Lowe’s has very few alternatives now as it increases debt and thus ballooning subsequent finance & interest charges, other than to slash overhead. Management labor is abundant (Circuit City) & their getting rid of heavy overhead as well as experienced (expensive) management labor at the store level. Further, it’s damaged domestic relationships (vendor/suppliers/manufacturers) so badly by hold funds and outright heavy handed tactics in the past, that you have plenty of examples of manufacturers that are slow to react with resupply unless money is in hand. If this recession goes any further than the experts think, you may find out that CASH is KING, you can decide who is wearing the crown in 2009!

Joined: 08 Jul 2003 Posts: 6045

I'd be carefull with some of those metrics .Some can be very telling but others are mear manipulation .The old rules of stock and company vitality are out in this economy .

Lowes and HD are pretty even in that the boom bust is killing them both .

Raw numbers are just as telling .I think HD has over a BILLION dollars in debt due this year .Combine that with drops in sales the 09 year might not look to good .

Personally I think HD has made a greater effort to staff stores in my area at least .I frequently see almost double the staff comparted to just 2 years ago .It's ashame this is the staffing they actually needed during the boom .That's why their sales started leveling or dipping by 05-06 .

HD over built by their own admission canabilizing their own store sales .That is HDs achilles heel .Lowes built slower but probably smarter .

Joined: 22 Dec 2007 Posts: 445

Sometimes it's better to hold back on expansion if it means debt. There's an article on Circuit city and it lists how they basically did everything on credit. Their cash registers were rented...even the rug mats were!

I worked for a company that was small in the 80's and 90s. Competitors were FAR larger..but the company didn't have debt...gradually the larger companies made some serious mistakes. OK so they bought out a chunk of this one, chunk of that one, smaller one here and there. Now they are the largest in north america in that field. Although in all honesty I'd say the growth stopped around 2007 and it's stagnated since.

Joined: 14 Nov 2008 Posts: 36

I agree that the metrics I’ve touched on can be misleading or used to push a biased argument, but that would be the reason that I lumped several together. My opinion of HD's debt is not so much numeric in raw dollars, but the fact that even in a bad economy, HD is reducing their exposure to overall debt. Specifically, in the last quarter of 08, consumers are not spending what would be considered positive cash at the end of the year & a good deal of that comes from the impulse purchase (e.g. holiday gear). That end of year spending will not make or break either big box, but that being said, the average consumer was spending $20 more per single purchase at HD. What’s even larger is that the average number of trips to both boxes was the same in the 4th quarter. That’s why I’m on the page that something is different at HD and seems to be in part a function of experienced labor, which is translating to higher average dollar sales per trip. When you couple higher sales dollars per visit with the reduction of Interest Coverage Ratio for the entire system, that indicates two cash flow positives in a tight spending economy giving you more cash flexibility. This further translates to better control on cash as well as increased flow which ultimately institutes stability in a time that “cut overhead” panic seems to be the response. This really could be the year of reckoning for Lowe’s based on how they manage moral & the bodies of their labor pool. With amount of people looking for jobs, Lowe’s is cutting experienced labor and replacing that individual with non-experience personnel to try and curb overhead. However Lowe’s debt interest ratio is much higher & that suggest that its not being managed. HD is maintaining their current pool & being able to pick from the best of the unemployed pool & boosting qualified experienced labor. That being the case, an intangible factor is loyalty. Loyalty, in retail & any job for that matter is often short lived, which is why I reference it as intangible. However, that intangible ‘asset’ when it’s present, is not only at the employee level, but the consumer as well. If you were let go by Lowe’s or Sears & HD hired you even at less than you were making, there would be a level of gratitude & I’m pretty sure you would promote it.

Joined: 22 Dec 2007 Posts: 445

If hd is closing stores how can they be retaining their current labor pool? I know a fair amount of former hd staff that were canned.

I don't know of any that have been let go other than that team lead change (and even then they are still there)

Joined: 14 Nov 2008 Posts: 36

Expo is not the same as a normal Home Depot store. Besides it caters to a market that has been dead for over year, it just makes sense to get rid of it. That's why the whole coverage of HD closing stores is misleading to the average person. You don't go to Expo to purchase lumber....

Joined: 22 Dec 2007 Posts: 445

OK...but if it isn't the same than that means it should be already discounted from the store count. People can't have it both ways...

expo carried stuff that would be sos in lowes stores...

expo is part of hd so of course it reflects off of it. That's like arguing that Saab does great but GM is crap...um.

No one I know would honestly go to hd or lowes to get lumber. The quality is extreamly poor. Higher grades can be found at lumber yards.

Neither chain has put competitiors out of business. I still find plenty of hardware stores, lumber yards, electrical supply, plumbing supply etc. Granted no one is doing well in this economy but they are still around.

Joined: 14 Nov 2008 Posts: 36

88th consective quarter, HD declares a cash dividend. Where's Lowe's at? Wait, I forgot, they had a bad 4th quarter.

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