Final Report Home Depot Vs. Lowes

4834 words - 19 pages

Final ReportThe purpose of this paper is to provide our final analysis of reviewing cash flows, identify and describe three of the largest variable expenses, explain the five operating expenses of Home Depot and Lowes and to determine which one is better managed from the perspectives of profitability, asset utilization, risk management and cash flow management.First, I will review the consolidated statements of cash flow for both companies for the three most recent fiscal years and identify how much cash was generated by operating, financing investing activities and other significant events that affected the cash position.The statement of cash flows for both Home Depot and Lowe's are objective views of the financial activity of the organizations. However, the results of cash flows activity are quite different. Lowe's has had consistent increases in net cash provided by operating activities with a 25% increase from 2004 to 2005 and a 17% increase from 2005 to 2006. On the other hand, Home Depot showed almost no change from 2004 to 2005 and a 16% increase in net cash from operating activities from 2005 to 2006. Lowe's attributed their positive numbers from keeping a lower investment in inventory. Lowe's primary component of cash flows from investing activities was almost exclusively from investing in new stores, remodeling and remerchandising existing stores and specific investment in their distribution center as well as their information technology infrastructure. Home Depot's net cash used for investing activities had almost no change (2%) from 2004 to 2005 but had a dramatic increase from 2005 to 2006 of 67%. This was primarily due to aggressive business acquisition strategy. Home Depot spent $4.3 billion to acquire 15 business entities along with spending $3.5 billion in new stores, existing store modernization and their technology infrastructure. This trend appears to continue in light of the announcement on Aug. 28 that Home Depot will sell its wholesale distribution business for $8.5 billion resulting in approximately $7.9 billion in cash that will apply to their cash flows from investing activities.. Lowe's experienced a 73% drop from 2004 to 2005 in their net cash used in financing activities followed by a 300% increase from 2005 to 2006. The primary reason the increase was so dramatic was due to a repurchase of common stock. Home Depot's net cash used in financing activities went down 38% from 2004 to 2005 and dropped a whopping 88% from 2005 to 2006. This was due primarily to net proceeds of $7.6 billion from the issuance of additional long term debt. This was partially offset by a net increase in $4.2 billion as part of their stock repurchase plan.Home Depot showed an increase of 56% in cash and cash equivalents from 2004 to 2005 and a subsequent drop of 25%, leaving 2006 with $600 million at the end of 2006. This compares to Lowe's drop from 2004 to 2005 of 20% followed by another drop from 2005 to 2006 of 14%, making their 2006...

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