Income statement analysis of Home Depot, Lowe's, and Wolseley

Income Statments

Home Depot, Lowe's and the British company Wolseley are three of the major companies in the building materials retailing industry. This paper will compare the revenues of these three companies over the past five years to gain a sense of how they have been performing. The prevailing economic conditions have been negative for the industry, since the industry is heavily dependent on the health of the housing market (Isidore, 2012). With only in recent months there having been signs of improvement in the U.S. housing market, none of these companies are expected to have enjoyed much success over the course of the past five years. This paper will, using income statement data, analyze how well each of these companies has weathered the economic downturn.

Home Depot

Home Depot earned revenues of $70.395 billion in FY 2012, an increase of 3.5% over the previous year. However, the current level of revenue is below that of FY2009 and FY2008, when the company earned $77.349 billion. Thus, while the company has increased its revenues in the past two years, Home Depot has not yet reached anywhere near its pre-recession revenue figures. The following graph illustrates how the revenue of Home Depot declined and then has started back on a slow growth trajectory.

Lowe's did not suffer in the recession nearly as much as Home Depot. In FY 2012, Lowe's saw its revneue increase 2.85% to $50.208 billion. The trajectory of revenue is not as dramatic for Lowe's as it was for Home Depot. The company basically saw reveues flatline for the past four years, prior to the increase last year. This difference could hihglight some operating differences between Lowe's and Home Depot. Lowe's may not operate in the more cyclical U.S. housing markets, or it might have a slightly different target market than Home Depot has. Regardless, the steadiness of the revenues at Lowe's is superior to that of Home Depot, and the company has now moved ahead of its FY2008 revenues, something Home Depot is nowhere near doing.

Wolsely operates mainly in the UK and Europe, with a much smaller presence in the North American market. However, Europe has also struggled in recent years with respect to its housing market and overall economic health. The UK market in particular has struggled, and has even re-entered recession in recent months (Moulds, 2012). Wolseley's revenue figures reflect this ongoing slowness. The company saw its revenues decline in the period from 2008-2010, but the rebound in 2011 has come undone. The revenues for 2012 declined by 1%, and this was the only company to see a decline in the last year. It is highly likely that the ongoing weakness in the United Kingdom is a major contributing factor in the inability of Wolseley to improve its revenue last year. Indeed, the company cites strength in the U.S. And Canada as a reason why it did not decline further last year with the challenges in Europe. The reveue for chart for Wolsley is as follows:

It should be noted that this represents the dollar figures, not the sterling figures, as it is easier to compare the performance of the companies using the same currency unit.

In addition to revenues, it is important to study the changes in profits for the different companies as well. After all, the objective of business, after earning revenue, is to convert that revenue into profit. Home Depot's net income has followed roughly the same course as its revenue. This was highest in 2008, when HD earned $4.395 billion in profit. However, profits decreased signifcanly with the onset of recession. However, profits have been on a steady increase since FY2009. Last year, Home Depot earned $3.883 billion in net income, up 16.3% from $3.338 billion in FY 2011. The company's net margin of 5.5% is close to where it was in FY2008 when it was 5.68%.

While Lowe's has held its revenues fairly steady, there has been more flucutation in the company's net income. Last year, net income at Lowe's declined by 8.5% despite the slight increase in revenue. As with Home Depot, Lowe's saw its net income at its highest in FY2008, with $2.809 billion, and it has remained significantly below that level since then. The company earned more revenue in FY2012 but had a lower level of net income, which indicates that it has faced more internal struggles than its rival even as it has handled the challenges in the external environment better.

Wolseley earned $60 billion last year, down 78.% from the $281.6 billion it earned the year before. This company has had the biggest struggles with the economy. By 2008, Wolseley was already struggling and earned just $242 million from continuing operations. The next two years saw Wolseley lose over $1 billion combined. It has not earned back those losses yet. It is impressive that the company has shrunk in size, and suffered a net loss from operations in the past five years yet throughout that has managed to maintain a stable value for the shareholders' equity.

These changes are significant for each of these companies. The biggest concern for Lowe's and Wolseley is that their profits declined last year. For Wolseley the decline in revenue is also a concern, and the company needs to reverse the trend it is on. However, its dependence on soft, recessionary markets in the UK and Europe lies at the heart of its problems. For Lowe's, the implications are different because the company has had stable revenues, but unstable profits. The company needs to find a way to improve its internal controls so that its margins are improving, not decreasing.

Home Depot therefore is in better financial conditoin than its rivals. The first point is that while its revenues are not nearly where they were five years ago, the net margin is almost back to the level of five years ago. Faced with a steep decline in revenues, Home Depot has therefore undertaken significnat internal controls to help the company whether the economic storm. As a result, the bottom line is improving faster than the top line, which is something that the other two companies cannot say. It is worth noting that this will position Home Depot well for the future, as the company has its internal factors under control.

Given that the U.S. market is starting to see a slight recovery in the housing market, there is room for optimism with respect to Home Depot's financial condition. It is expected that if existing trends hold, that Home Depot will outperform both Lowe's and Wolseley with respect to net income if not revenues in the coming years. Home Depot is in sound financail positoin and it well-positioned to ride the economic recovery.