Income Statement Analysis: Home Depot, Lowe's, and Wolseley

Introduction

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

Revenue Performance: Home Depot

Home Depot earned revenues of $70.395 billion in FY 2012, an increase of 3.5% over the previous year. However, this figure remains below the FY 2009 and FY 2008 levels, when the company earned $77.349 billion. Thus, while the company has increased its revenues over the past two years, Home Depot has not yet come close to its pre-recession revenue figures. The company's revenue declined sharply during the recession and has since embarked on a slow but steady growth trajectory.

Revenue Performance: Lowe's and Wolseley

Lowe's did not suffer during the recession nearly as much as Home Depot. In FY 2012, Lowe's saw its revenue 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's revenues essentially flatlined for the four years prior to the increase in the most recent year. This difference could highlight some operating distinctions between Lowe's and Home Depot — Lowe's may not operate as heavily in the more cyclical U.S. housing markets, or it may serve a slightly different target market. Regardless, the steadiness of Lowe's revenues is superior to that of Home Depot, and the company has now moved ahead of its FY 2008 revenue figure, something Home Depot is nowhere near achieving.

Wolseley operates mainly in the UK and Europe, with a much smaller presence in the North American market. Europe has also struggled in recent years with respect to its housing market and overall economic health. The UK market in particular has struggled, having even re-entered recession in recent months (Moulds, 2012). Wolseley's revenue figures reflect this ongoing weakness. The company saw revenues decline from 2008 to 2010, and the partial rebound seen in 2011 has since unwound. Revenues for 2012 declined by 1%, making Wolseley the only company among the three to record a revenue decline in the most recent year. The ongoing weakness in the United Kingdom is a major contributing factor in the company's inability to improve revenue. Indeed, the company cited strength in the U.S. and Canada as the reason it did not decline further, given the challenges in Europe. It should be noted that the figures presented represent dollar amounts rather than sterling, as using a common currency unit makes comparison across companies more straightforward.

Net Income Comparison

In addition to revenues, it is important to examine the changes in profits for each company. After all, the objective of any business — beyond earning revenue — is to convert that revenue into profit. Home Depot's net income has followed roughly the same course as its revenues. Net income was at its highest in FY 2008, when the company earned $4.395 billion. Profits then decreased significantly with the onset of recession but have been on a steady upward trend since FY 2009. 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 stood in FY 2008, when it was 5.68%.

While Lowe's held its revenues fairly steady, the company's net income has fluctuated more noticeably. Last year, net income at Lowe's declined by 8.5% despite the slight increase in revenue. As with Home Depot, Lowe's saw net income peak in FY 2008 at $2.809 billion, and it has remained significantly below that level since then. The fact that the company earned more revenue in FY 2012 but recorded a lower level of net income indicates that it has faced greater internal operational challenges than its rival, even as it managed the pressures of the external environment more steadily.

Wolseley earned $60 million last year, down 78% from the $281.6 million it earned the prior year. This company has faced the most severe struggles with the broader economy. By 2008, Wolseley was already under stress and earned just $242 million from continuing operations. The following two years saw the company lose over $1 billion combined. It has not yet recovered those losses. It is notable that despite shrinking in size and recording net losses from operations over the past five years, the company has managed to maintain a relatively stable level of shareholders' equity.

Conclusion

The income statement analysis of these three companies highlights that Home Depot has operational superiority. While it has not recovered its revenues to the extent that Lowe's has, Lowe's has seen its net income fluctuate significantly relative to the stability of its revenue. Lowe's has not converted its revenue increases into profit increases, and that is a meaningful weakness. Home Depot, despite facing a more pronounced revenue challenge, has responded effectively, and the results of that response are visible on the bottom line. Wolseley, by comparison, is in the most difficult position. The weakness of the UK market has prevented the company from maintaining momentum in either revenues or profits. On balance, Home Depot is the best-positioned of these three companies in terms of overall financial condition.

Works Cited

Home Depot 2011 Annual Report.

Isidore, C. (2012). Home Depot: Housing market is healing. CNN. Retrieved November 25, 2012 from http://money.cnn.com/2012/11/13/news/companies/home-depot-earnings/index.html

Lowe's 2011 Annual Report.

Moulds, J. (2012). UK manufacturing stagnation revives double-dip recession fears. The Guardian. Retrieved November 25, 2012 from http://www.guardian.co.uk/business/2012/nov/22/uk-manufacturing-stagnation-recession-fears

MSN Moneycentral: Home Depot. (2012). Retrieved November 25, 2012 from http://investing.money.msn.com/investments/stock-balance-sheet/?symbol=us%3AHD&stmtView=Ann

MSN Moneycentral: Lowe's. (2012). Retrieved November 25, 2012 from http://investing.money.msn.com/investments/stock-balance-sheet/?symbol=us%3ALOW&stmtView=Ann

MSN Moneycentral: Wolseley plc. (2012). Retrieved November 25, 2012 from http://investing.money.msn.com/investments/stock-balance-sheet/?symbol=us%3AWOSCF&stmtView=Ann

Wolseley 2012 Annual Report.