Home Depot is a stock that I have been researching the financials for about 5 years. The following report is using fiscal 1996 but I have had similar results for all years since 1993.
About five years ago I started to investigate Lowe's and Home Depot for a possible investment. I reviewed both annual reports. On the surface Home Depot looked like the best candidate. After reviewing the financials, one balance sheet entry seems to stand out... the accounts payable figures seem to be too low. I took my research a little further and compared their numbers to all the major players in the retail industry and found Home Depot's current payables to be much lower percentage wise (as a percentage of annual sales) than any other retailer.
I have had discussions with many vendors that are counter to what HD's controller told me about Home Depot and their paying habits. One vendor went as far as to say that Home Depot was the slowest payer in the industry. As you will see below the Dun & Bradstreet report I acquired seems to show that Home Depot is not the fastest payer in the industry, as their numbers seem to show. It is my opinion, based on my research, that Home Depot enjoys an unwarranted and unfair financial advantage over their competitors.
Home Depot (HD) fiscal 96 reported total sales of $19,535,503,000. Their weighted average weekly sales per store were $803,000. They had 512 stores opened as of February 2, 1997. To arrive at their estimated sales for the month of January 1997 (the last month of their fiscal year) I multiplied $803,000 times 4.3 weeks in the month, times 512 stores = $1,767,885,000 sales per month weighted average. I multiply this by 12 months in the year to annualize sales at $21,214,620,000. The U.S Department of Commerce estimates show that about 8% sales for a year take place in January. $21,214,620,000 times 8% equals $1,697,170,000 for the estimated sales for the month of January 1997.
HD cost of goods was 72.2%. If you take January sales times 72.2% you get a dollar cost of goods of $1,225,357,000. This is the estimated cost of the goods sold for the month January 1997. To me a reasonable assumption would be that HD would have at least bought an equal amount of goods to replace those sold in January not taking in account a build up of inventory for the upcoming spring. And also, that they would buy those goods with terms of 30 to 60 days. One may argue that HD possibly reduces their inventory for year-end to save on inventory cost. Through my investigation this is not true. Due to the size of HD, cycle counts are taken throughout the year.
Accounts payable on the balance sheet would include the amounts owed on inventory purchased. In addition it would include office supplies, maintenance supplies, certain non-reoccurring services, and other non-accrued expenses for both in store and the support center. These miscellaneous account payables I would estimate at 2% or about $3,400,000. HD reported accounts payable of $1,089,736,000.
What I find disturbing is this. I believe the reported accounts payable figure is too low and under reported. The reported figure is only about 89% of the $1,225,357,000 needed to just replace the goods sold for the month or roughly just 27.6 days (89% x 31 days) worth of purchases. These figures do not include other payables as mentioned above of an estimated $3.4 million. My findings below appear to confirm my statement above:
1. Inventory per store averages about $5.3 million per store. HD annual report states that $2.2 million of a new stores inventory is vendor financed. HD opened 89 new stores. Vendor financing alone would equal an estimated $196 million. The report states and I quote, "Additionally, a significant portion of the Company's inventory is vendor financed under vendor credit terms."
2. A Dun & Bradstreet report shows that out of 248 accounts 73% are paid within terms but 27% are past due. They show a payment trend that is in the lower and slower 25% of comparable companies in their industry let their accounts payable total would indicate that their accounts would be more than current with payments made well in advance of due dates.
3. Industry vendors tell me that HD is one of the hardest negotiators for not only price but terms also. We know in this industry that extended dating (vendor approved delayed billing) is common. We know that common terms for this industry is 30 and 60 days and dating can be as long as an year. HD account payable figure does not appear to have any indication that any deferred payments are taken.
4. HD peers in the retail do not seem to share the same "low payables". I calculated a ratio for comparison. Total annual sales divided by accounts payable equals "Accounts Payable Ratio". As Peter Lynch mentions in his book, a high payables dollar figure is good because it shows that management is getting the best use of the funds flowing through their business. It should also be noted that growing business should have an advantage using this ratio because of the ever-expanding base of the annual sales figure. A lower ratio would show that a business is holding their funds as long as possible to put this cash to work for them for growth and investment income. I have included ratios for companies in other industries for comparison;
Lowes 9.41, Eagle Hardware 13.76, HD 17.93,
Walmart 13.75, Circuit City 10.63, Sears 5.29,
Dell 7.46, GE 7.76, Merck 6.75,
After reviewing the above I think one would have to ask themselves "how do they do it?" and "why?" Certainly HD could use the extra money. If they defer payments enough to knock 5 points off their ratio to 12.93 they could raise nearly $500 million dollars. They wouldn't need the $1 billion dollar 3 ¬% Convertible Subordinated Note that is dilutive to earnings and at conversion will cause HD to give away equity cheap.
The evidence seems to show that HD does not have the ability to extend their payables out further. The D&B imply that they have their vendors pushed out as far as they can go and still maintain a good relationship. However, their payables ratio says they are paying vendors quicker than any company shown and many others that I sampled. In fact, out of about 30 companies sampled I could not find one that had a better payable ratio. These two factors do not go hand in hand. Something seems to be wrong!
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