HD Low Home Depot Lowe's and Wolseley Essay
- Length: 6 pages
- Sources: 6
- Subject: Business
- Type: Essay
- Paper: #18178667
Excerpt from Essay :
Home Depot, Lowe's and Wolseley are all companies in the hardware store business. Home Depot and Lowe's are primarily American while Wolseley has operations in a number of different companies but has its home market in the United Kingdom. All of these companies are highly susceptible to the economic conditions surrounding the housing market and the general health of the economy overall. This paper will focus on how these companies have fared in the past few years, specifically with reference to their statements of cash flows.
Cash Flow Analysis
For Home Depot, the most significant source of cash is from operations. Cash flow from operations contributed $6.651 billion in the 2012 fiscal year. Most of this derived from the net income. In all of the past five years, the company received most of its inbound cash from operations. In FY2008, this was the only year where Home Depot received inbound cash flows from another funding sources, in that case investing cash flows, which included the sale of a business was the major contributing factor.
The most significant cash disbursements in each of the past five years come from financing activities. In every year except FY2010 and FY2009, the retirement of stock was the largest single cash disbursement for Home Depot. The company has made low levels of capital expenditures over this period, but for the most part when the company's profits are high it likes to buy back stock in order to prop up the stock value. Home Depot in FY2010 and FY2009 did not perform much in the way of share buybacks. Instead, the most significant disbursements in these two years came from the retirement of debt. These were challenging years in terms of income (FY 2010 was basically calendar year 2009) and Home Depot moved during these years to shore up balance sheet weakness instead of engaging in share buybacks. Dividends have been at a relatively steady level and comprise a significant portion of cash outlays.
For Lowe's, cash flow from operations remains the primary source of cash flows. While most of this derives from the starting line, depreciation expense adds a lot to that starting line. The most significant source of cash outflows at Lowe's has varied over the years. For the past two years, share buybacks were the largest single outlays, at $2.8 billion and $2.5 billion respectively. In FY2010, however, the biggest outlay was for capital expenditures. This year actually saw a reduction in capital expenditures from prior years, but Lowe's dramatically cut its share buyback program during those years of economic recession and threatened cash flows. In FY2009 and FY2008, capital expenditures were $3.2 billion and $4 billion respectively and these were the largest cash outflows. The retirement of stock in FY2008 was also a significant amount at $2.1 billion but in FY2009 the company issued more stock than it bought back, due to the challenging economic climate.
At Wolseley, cash flow from operating activities was the most important source of inflows. In the past two years (FY2010 and FY2009), the company had a negative net income, so the positive cash flow from operations was only achieved through changes in working capital, notably clamping down on receivables and inventories in order to reduce non-cash working capital. The biggest outlays for Wolseley have traditionally been for capital expenditures. The one exception was in FY2009 when the company recorded an outflow of £216 million under "other cash flows from financing activities." This was the largest single cash outflow for that year.
The following graph presents the cash flow from operations for each company for the past several years:
For each company, operations were the primary source of capital. Although the prevailing economic conditions were difficult, none of these companies needed to fund itself through the issuance of debt or equity. While Home Depot did sell off assets one year for cash, these were not the deciding factor in how the company was financed that year -- there were still healthy cash flows from operations. The cash outflows, however, were quite different from one company to another. Both Lowe's and Home Depot have traditionally relied on share buybacks in order to boost their stock price. During the recession years, however, these programs stopped and the companies spent their money either investing in the business (Lowe's) or paying down debt (Home Depot). It is worth noting that for both Lowe's and Home Depot, there were declines in capital expenditures to reflect that their industry is not growing as quickly as it did in the mid-2000s. Wolseley nearly stopped capital expenditures altogether, a reflection of the fact that that company has seen its revenues decline more than once in the past few years. Wolseley also did not engage in share buybacks to the extent that the other firms did in the past five years.
The statement of cash flows can be revealing about the health of the company. The first thing that needs to be considered is the cash flow from operations. Any company should want this to be positive, if not the primary source of financing. It is important that the company can finance itself from its operations -- if it is relying on debt then insolvency is not far away. None of these companies are relying on external financing for their operations, which is good and means that they are all, more or less, in good financial condition.
Another element to examine when considering the financial health of these companies is the uses of funds. In particular, how these companies responded to the recession is important. Home Depot paid down debt, both Home Depot and Lowe's halted their share buybacks, and all three companies cut back on capital expenditures. All of these companies recognized that the economic circumstances were going to be challenging and took steps to ensure that these challenges were going to meet. They all were able to improve their net cash positions during the recession, which shows that there is strong fiscal management at all three companies to meet the challenge of the recession.
Also, when examining the financial conditions of these companies, the cash flow statement can reveal the approaches that these companies took to expansion. The statements reveal that capital expenditures were reduced dramatically at each company. Thus, senior management at these companies understands and reflects that they understand their business is not growing for the time being. They make the adjustments that they need to in order to deal with this reality. For the investor, it is good to know, however, that the management of these companies is not investing much in growth. Capital investments today should mean growth tomorrow, and right now the cash flow statements reveal that the outlook for the industry in general is mainly for slow growth, so there might not be strong incentive to invest in any of these companies knowing that is the case.
The cash flow statement illustrates that Home Depot is a fairly strong company. The company's size has been reduced with the recession and it needs to be considered that it will need to undertake further capital expenditures in order to fuel future expansion. However, this depends on the strength of the U.S. housing market, which fortunately looks like it is going to be improving (Isidore, 2012). As a result of this improvement, it is recommended that Home Depot ramps up its spending on capital expenditures. This will allow the company to grow more in the future as growth resumes in the U.S. economy. The company should avoid share buybacks for a year or two. As nice as it is to prop up the share value, the company should focus on fundamental improvements such as expansion and store upgrades.
Lowe's has done well to maintain its…