Available via license: CC BY 4.0
Content may be subject to copyright.
A Financial Analysis and Valuation of Home Depot
Haolin Ma1,a,*
1School of Statistics, Renmin University of China, Beijing, 100872, China
a. mahaolin663@ruc.edu.cn
*corresponding author
Abstract: This paper presents a detailed financial analysis and market evaluation of major
players in the home improvement industry—Home Depot, Lowe's, Wayfair, and Floor &
Decor Holdings. It assesses these companies based on their liquidity, solvency, and
profitability to provide investors with actionable insights into their financial health and
market position. The analysis reveals that Wayfair, despite its robust short-term liquidity,
faces challenges with profitability. Home Depot and Lowe's both demonstrate strong
financial stability with efficient operations that translate sales into profit effectively, though
Lowe's exhibits some concerns related to its debt levels. Floor & Decor shows impressive
growth but must improve its operational efficiency to enhance profitability. Additionally, the
study explores industry trends impacting these businesses, including changes in consumer
preferences and economic conditions affecting spending on home improvements. It also
examines the companies' responses to these trends, such as adapting their business models
and strategies to sustain growth and competitiveness. The paper concludes with investment
considerations, highlighting Wayfair as a potentially high-reward but risky investment due to
its growth prospects and operational challenges. Home Depot remains a relatively safe bet
with stable financial returns, while Lowe's and Floor & Decor might require cautious
evaluation due to their financial and market positions. This comprehensive analysis serves as
a crucial tool for investors aiming to navigate the complexities of the home improvement
sector and make informed decisions.
Keywords: The Home Depot, Financial Analysis, Valuation, Home Improvement Industry
1. Introduction
This paper aims to analyze several leading companies in the home improvement industry, including
Home Depot, Wayfair, Lowe's, and Floor & Decor Holdings. Through a deep examination of these
companies' business models, market performance, and recent developments, this paper aims to
provide valuable insights and recommendations for investors.
Home Depot is a global leader in the retail of home improvement and construction products,
primarily catering to builders, contractors, and do-it-yourself customers. With a vast network of
physical stores and an expanding online presence, the company holds a substantial market share in
the United States, Canada, and Mexico [1]. Over the past four years, the financial year 2024 marked
a downturn in its rising trend, with revenues dipping to $152.669 billion. The company's impressive
peak in the prior year could be attributed to strategic expansions and market demand.
Proceedings of the Decoupling Corporate Finance Implications of Firm Climate Action - ICEMGD 2024
DOI: 10.54254/2754-1169/110/2024ED0120
© 2024 The Authors. This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0
(https://creativecommons.org/licenses/by/4.0/).
180
Lowe's is a major retailer of building materials and home improvement products, with a presence
comparable to Home Depot across the United States and Canada. Targeting both DIY consumers and
professional contractors, Lowe's focuses on offering high -quality products and excellent customer
service [2]. With a steady increase in total revenue from $89.597 billion in 2021 to a high of $97.059
billion in 2023, The subsequent fall to $86.377 billion in 2024 could suggest a correction after an
exceptional growth phase.
Wayfair operates as an online retailer specializing in furniture, home decoration, and household
goods. Renowned for its extensive product selection and convenient shopping experience, the
company serves customers primarily in North America and Europe. Wayfair's revenues have declined
consistently from a high of $14.145 billion in 2020 to $12.003 billion in 2023, As an online retailer,
Wayfair's dip could reflect the normalization of online shopping trends post a boom during certain
events like the pandemic.
Floor & Decor Holdings specializes in flooring and related decor materials, offering a wide range
of products including hardwood, tile, stone, and accessories. With numerous stores across various
states in the U.S., the company caters to both residential a nd commercial customers. Floor & Decor
Holdings had a remarkable growth trajectory, with revenues climbing from $2.426 billion in 2020 to
$4.414 billion in 2023. This annual increase suggests a successful expansion strategy.
On the positive side, the industry seems to be bouncing back, with an anticipated improvement in
the availability of raw materials, although prices are expected to be higher. Home improvement trends
are shifting to focus on quick remodels that improve the quality of life and accessibility within homes.
This includes adding features like grab bars, walk-in showers, and smart home upgrades. Another
trend driven by the ongoing impact of the pandemic is the increase in remote work, which has led to
sustained demand for home office renovations. Additionally, tax credits for energy-efficient home
improvements are encouraging homeowners to invest in renovations that will bring long-term savings
and environmental benefits. The industry is also facing challenges. The Harvard Joint Center for
Housing Studies predicts a downturn in home remodeling, with spending expected to shrink for the
first time since 2010, though the rate of decline may ease towards the end of the year [3]. This
anticipated downturn is attributed to high prices, elevated interest rates, and weak home sales, which
create uncertainty and may dampen remodeling activity.
2. Performance Evaluation
This section evaluates the liquidity, solvency, and profitability of Home Depot (HD) and its
competitors Lowe's (LOW), Wayfair (W), and Floor & Decor Holdings (FND). These financial ratios
provide insights into the ability of these companies to meet their short-term obligations, manage long-
term debts, and generate profits. This comprehensive analysis highlights the strengths and potential
challenges each company faces in maintaining financial stability and growth.
2.1. Liquidity
Table 1: Liquidity ratios of Company HD and its competitors.
HD
LOW
W
FND
Current Ratio
135.25%
122.50%
84.97%
114.29%
Quick Ratio
39.97%
13.98%
81.54%
18.27%
Cash Ratio
17.08%
7.89%
61.89%
2.98%
Data Source: Nasdaq.
According to the current ratio shown in Table 1, it can be concluded that HD has the highest current
ratio of 135.25%, indicating that it has sufficient current assets to cover current liabilities and has
Proceedings of the Decoupling Corporate Finance Implications of Firm Climate Action - ICEMGD 2024
DOI: 10.54254/2754-1169/110/2024ED0120
181
very strong liquidity. LOW and FND also have high current ratios of 122.50% and 114.29%,
respectively, indicating good short-term solvency. W’s current ratio is relatively low, at 84.97%,
which means that its current assets are less than its current liabilities and may face some liquidity
pressure.
For quick ratio, the quick ratio of W is extremely high, reaching 81.54% and indicating that even
without relying on slow-moving assets such as inventory, the company can still meet short-term
liabilities well. HD also has a high quick ratio of 39.97%, demonstrating good debt-paying ability.
The quick ratio of FND and LOW is relatively low, at 18.27% and 13.98% respectively, which may
indicate that these two companies rely on a larger proportion of inventory or other assets that are not
easily liquidated quickly.
For Cash Ratio, W exhibits a very high cash ratio of 61.89%, demonstrating that it has ample liquid
assets to cover its current liabilities. HD’s cash ratio is also relatively strong at 17.08%, suggesting a
comfortable cash and equivalents position. LOW and FND have lower cash ratios at 7.89% and 2.98%,
respectively, indicating higher short-term liquidity risk.
In conclusion, W exhibits very strong debt repayment capabilities in the short term, which could
be attributed to its business model heavily reliant on direct-to-consumer sales online, minimizing
physical inventory needs compared to traditional retailers; HD shows good overall liquidity across
all three indicators, it has maintained a focus on enhancing customer experience and operational
efficiency, which helps sustain its financial health. LOW and FND, while having adequate current
ratios, their lower quick and cash ratios suggest potential reliance on slower-to-convert assets or
future income to meet short-term liabilities. FND has been opening new stores and entering new
markets, such as the flagship store in New York City. Such expansions require significant capital
outlays, which could tie up cash that otherwise might bolster liquidity measures; LOW has also
demonstrated commitment to expanding its market share, particularly in the professional contracting
space [4].
For W and HD, such liquidity metrics may be more attractive to investors, whereas LOW and FND
might need strategic adjustments or improvements to enhance their liquidity positions.
2.2. Solvency
Table 2: Solvency ratios of Company HD and its competitors.
HD
LOW
W
FND
Total Debt Ratio
98.64%
136.01%
177.92%
58.59%
Long-term Debt Ratio
55.85%
84.66%
89.00%
4.18%
Interest Ratio
11.25
8.36
-
32.48
Data Source: Nasdaq.
For total debt ratio shown in Table 2, W has the highest total debt ratio at 177.92%, indicating that it
has significantly more debt than assets; LOW follows with a total debt ratio of 136.01%, also
indicating substantial reliance on debt and HD has a lower yet substantial total debt ratio at 98.64%;
FND presents a much healthier picture with a total debt ratio of 58.59%, showing a more balanced
approach between debt and assets.
For long-term debt ratio, W again shows a high long-term debt ratio at 89.00%, suggesting a
significant amount of its debt is long-term; LOW also has a high long-term debt ratio at 84.66%; HD
has a moderate long-term debt ratio of 55.85%, reflecting a more conservative debt structure; FND
has a very low long-term debt ratio of 4.18%, indicating minimal reliance on long-term debt, which
may imply greater financial flexibility and less risk of long -term financial commitments.
Proceedings of the Decoupling Corporate Finance Implications of Firm Climate Action - ICEMGD 2024
DOI: 10.54254/2754-1169/110/2024ED0120
182
For Interest Coverage Ratio, FND stands out with an exceptionally high-interest coverage ratio of
32.48, highlighting its strong earnings ability to cover interest expenses comfortably; HD and LOW,
with interest ratios of 11.25 and 8.36, still maintain ade quate coverage, though it is less robust
compared to FND; W had negative earnings before interest and taxes, which would make this ratio
irrelevant for the period.
In summary, HD's solvency ratios show a balanced approach to debt management, with a relatively
moderate total debt and long-term debt ratio; LOW shows higher total and long-term debt ratios
compared to HD, indicating a more aggressive debt position. Howev er, LOW has faced challenges
such as a significant decline in comparable-store sales and has been downgraded by analysts due to
performance concerns compared to its competitors; W has an aggressive growth strategy, primarily
funded through debt. W operates in the e-commerce space, which requires substantial upfront
investment in technology and market expansion. Its negative earnings before interest and taxes could
suggest potential challenges in generating sufficient earnings to cover interest expenses; FND has
very low long-term debt ratios and a high interest coverage ratio, indicating strong earnings relative
to its debt obligations.
2.3. Profitability
Table 3: Profitability ratios of Company HD and its competitors.
HD
LOW
W
FND
Gross Margin
33.38%
33.39%
30.55%
42.10%
Operating Margin
14.21%
13.38%
-6.77%
7.28%
Net Profit Margin
9.92%
8.94%
-6.15%
5.57%
Asset Turnover
2.00
2.02
3.40
0.98
Data Source: Nasdaq.
For gross margin shown in Table 3, FND stands out with the highest gross margin of 42.10%,
indicating its ability to retain a larger percentage of each dollar of sales as profit before accounting
for certain expenses; HD and LOW show very similar gross margins, around 33.38% and 33.39%
respectively; W has a slightly lower gross margin at 30.55%, which could be due to its e -commerce
business model that might involve higher logistics and operating costs.
For operating margin, HD has the highest operating margin at 14.21%, LOW follows closely at
13.38%, suggesting that they have efficient management of operational costs relative to sales; FND
shows a moderate operating margin of 7.28%; While W has a negative operating margin of -6.77%,
indicating that there are extremely high operating expenses compared to total revenue.
For net profit margin, HD and LOW again lead with net profit margins of 9.92% and 8.94%,
demonstrating its ability to translate sales into net income effectively; FND has a reasonable net profit
margin of 5.57%, lower than HD and LOW, indicating that it retains less net income from each dollar
of revenue; W shows a negative net profit margin of -6.15%, reflecting significant challenges in
achieving profitability under its current operating model.
According to asset turnover, W has the highest asset turnover ratio at 3.40, indicating that it
generates significantly more revenue per dollar of assets compared to the others. This high ratio is
typical for e-commerce platforms, which typically require less physical asset investment; HD and
LOW have similar asset turnovers, around 2.00 and 2.02 respectively, suggesting efficient use of
assets to generate revenue; FND has the lowest asset turnover at 0.98, indicating less revenue
generation per dollar of assets, which could be due to a heavy investment in physical stores and slower
turnover of inventory.
Proceedings of the Decoupling Corporate Finance Implications of Firm Climate Action - ICEMGD 2024
DOI: 10.54254/2754-1169/110/2024ED0120
183
In conclusion, HD demonstrates strong performance across all margins and decent asset utilization,
reflecting efficient operations and effective cost management; LOW follows closely but shows slight
variations that could imply room for improvement in cost control or operational efficiencies; FND,
despite its strong gross margin, needs to enhance its operational efficiency and asset utilization to
boost its bottom line; W faces significant challenges in terms of profitability and operational
efficiency, although it excels in generating revenue relative to its asset base. Strategies to convert this
revenue efficiency into profitability would be crucial for W’s sustainable growth.
3. Valuation
Next, this paper will conduct a valuation for four companies, judging their expected performance
through some of their financial indicators, and analyze the strategies and risks of the companies and
related industries [5].
3.1. Forecast
As Table 4 shown, HD’s TTM P/E is 23.09 and its NTM P/E is 22.73 (indicating stable earnings
expectations); LOW TTM P/E is 18.08 (lower, suggesting better valuation compared to HD), its NTM
P/E is 19.43; W’s TTM P/E is Negative (due to negative EPS), its N TM P/E is 69.67 (suggesting
significant growth expectations or high risk); FND Holdings’ TTM P/E is 54.00 (indicating
potentially overvalued status), its NTM P/E is 64.18 (increasing, suggests worsening valuation). HD
and LOW have P/E ratios indicating higher investor expectations compared to FND. W’s negative
TTM P/E is due to its negative EPS, but its high NTM P/E suggests that improvements in profitability
are expected.
For revenue growth rate, Both W (5.8%) and FND (5.8%) show significantly higher revenue
growth rates than HD (1.1%) and LOW (-2.3%). For the EPS growth rate, there is negative growth
for LOW (-7.0%) and FND (-15.9%); HD shows slight positive growth (1.6%). W currently has
negative TTM EPS but is expected to turn positive in the next twelve months [6].
HD’s PEG ratio of approximately 14 is significantly high, which suggests that the stock may be
overvalued given its relatively low growth rate of 1.6%. This high PEG ratio implies that the current
price is steep relative to the rate at which the company's earnings are expected to grow [7]. While the
other companies are not available.
W has the highest GP/A ratio (105.6%) among the four, indicating it is most effective at generating
gross profit from its assets despite its current net loss. This could be a sign of potential if the company
manages to control other costs or increase efficiency further; LOW (69%) also shows a strong GP/A
ratio, slightly higher than HD's (66.6%), suggesting efficient asset utilization; FND Holdings has the
lowest GP/A ratio (39.9%), indicating less efficiency in converting assets into gross profits compared
to the others.
HD’s annual gross margin shows fluctuation but is generally stable at around 33.5%. Net profit
margin has a slight decline to 9.9%; For its quarterly margins, gross margin slightly fluctuates
between 33.0% and 33.8%. Net profit margin has varied from 10.4% down to 8.1%; For LOW annual
margins, gross margin is stable at around 33.3%. Net profit margin increased from 6.5% to 8.9%; But
its quarterly net profit margin shows a consistent decrease from 10.1% to 5.5%; For W’s annual
margins, the gross margin has increased from 28.4% to 30.6%. Net Profit Margin has shown volatility,
improving from -10.9% to -6.1%; For its quarterly margins, gross margin increased slightly from
29.6% to 30.3%. Net profit margin shows fluctuating negative margins, showing signs of
improvement but remaining negative; FND Holdings’ annual gross margin has slightly increased. Net
profit margin shows a decreasing trend from 8.0% to 5.6%; Its quarterly net profit margin has declined
significantly from 6.4% to 3.5%.
Proceedings of the Decoupling Corporate Finance Implications of Firm Climate Action - ICEMGD 2024
DOI: 10.54254/2754-1169/110/2024ED0120
184
HD and LOW show stable gross margins with varying degrees of net profit margin stability. W
exhibits increasing gross margins but continues to struggle with negative net margins, though there
is an improving trend. FND Holdings shows very stable high gross margins but a concerning decrease
in net margins both annually and quarterly [8].
Table 4: Financial analysis of Company HD and its competitors.
HD
LOW
W
FND
Share Price
$348.67
$236.08
$71.06
$122.59
TTM EPS
15.1
13.06
-1.16
2.27
NTM EPS
15.34
12.15
1.02
1.91
EPS Growth Rate
1.6%
-7.0%
N/A
-15.9%
Revenue Growth Rate
1.1%
-2.3%
5.8%
5.8%
TTM P/E
23.09
18.08
(61.26)
54.00
NTM P/E
22.73
19.43
69.67
64.18
PEG
14.53
N/A
N/A
N/A
GP/A
66.6%
69.0%
105.6%
39.9%
Data Source: Nasdaq & Estimize.
3.2. Strategy & Risks
HD is focusing on modest growth through new store openings despite a general downturn in the
market. This strategy is aimed at capturing more market share and maintaining revenue streams even
as same-store sales decline. The company is responding to changing consumer preferences by
focusing on quick home remodels that improve quality of life and accessibility, such as smart home
features and more accessible bathroom fixtures. This reflects an adaptation to ongoing trends
accelerated by the pandemic, like remote work and energy efficiency. Like W, HD also focuses on
the enhancement of Online Capabilities: HD continues to develop its online presence to cater to the
surge in e-commerce, aiming to provide a seamless shopping experience that integrates its physical
stores and online platforms.
HD recently reported a slight decline in sales, with fourth-quarter revenue falling by 2.9% to $34.8
billion. This drop was better than expected, but same-store sales still fell by 3.5% globally and 4% in
the U.S. The decrease in "big ticket" transactions, those over $1,000, suggests that both builders and
homeowners are undertaking smaller projects instead of significant remodels. HD projects only a
modest 1% sales increase for the next fiscal year, primarily from new store openings, with same-store
sales expected to decline by 1%. As the market becomes more competitive, particularly with the rise
of online alternatives, Home Depot needs to continually innovate and improve its service offerings to
maintain its market lead. There are other risks for HD: Like many others in the retail sector, Home
Depot is potentially vulnerable to disruptions in the supply chain, which could affect inventory
availability and cost structures.
LOW reported a 6.2% drop in comparable store sales for Q4 2023. Despite this, it managed to beat
analyst forecasts. The company noted that its Pro segment held up better than its DIY segment, which
still constitutes the majority of its revenue. FND plans to continue expanding, with up to 35 new
stores expected to open, which might boost their overall sales. FND’s strategy to open new stores
could be doubted to help drive revenue growth. W started a physical store this year, profit margins
are often slim for physical retail, their revenue on it is still doubtful and it can also influence its NTM
EPS. W, despite the potential for revenue growth, faces challenges in turning this into profit.
The home improvement industry overall is facing a tough market with weak consumer spending
and a subdued housing market. Factors like inflation, slow housing sales, and a shift in consumer
Proceedings of the Decoupling Corporate Finance Implications of Firm Climate Action - ICEMGD 2024
DOI: 10.54254/2754-1169/110/2024ED0120
185
spending toward experiences rather than goods have contributed to this downturn [9]. However,
segments like DIY and new home construction are slightly less impacted but are still experiencing
slower growth compared to previous years [10].
4. Conclusion
Home Depot and Lowe's show stable gross margins with varying degrees of net profit margin stability.
Home Depot has more variability in net margins quarterly, while Lowe's shows improvement
annually. Wayfair exhibits increasing gross margins but continues to struggle with negative net
margins, though there is an improving trend. Floor & Decor Holdings shows very stable high gross
margins but a concerning decrease in net margins both annually and quarterly.
Based on the analysis above, Wayfair is more likely to be expected by investors. Considering that
both Lowe’s and Floor & Decor Holdings have negative EPS growth rates, choosing them might be
a value trap. Although Home Depot has a relatively stable performance and a positive EPS growth
rate, because it has a high PEG ratio, it is expensive per unit of growth rate. Moreover, both its net
profit margins and gross margins are declining according to quarterly and annual data. Moreover,
Wayfair performs exceptionally in terms of GP/A, and the NTM EPS performance is promising.
There is also hope that reductions in operating expenses could lead to a rebound in its net profit. It is
a risky but promising stock.
References
[1] Bianchi, C. C., & Arnold, S. J. (2004). An institutional perspective on retail internationalization success: Home
Depot in Chile. The International Review of Retail, Distribution and Consumer Research, 14(2), 149–169.
[2] Pinto, F. J. C. (2020). Equity research - Lowe’s Companies Inc., Universidade de Lisboa (Portugal)).
[3] Joint Center for Housing Studies of Harvard University. (2024). Downturn in home remodeling may bottom out in
2024. Harvard Joint Center for Housing Studies. https://www.jchs.harvard.edu/blog/downturn-home-remodeling-
may-bottom-out-2024
[4] Garleanu, N., & Pedersen, L. H. (2007). Liquidity and risk management. American Economic Review, 97(2), 193-
197.
[5] Damodaran, A. (2007). Valuation approaches and metrics: A survey of the theory and evidence. Foundations and
Trends in Finance, 1(8), 693-784.
[6] Eggert, A., Hogreve, J., Ulaga, W., & Muenkhoff, E. (2014). Revenue and profit implications of industrial service
strategies. Journal of Service Research, 17(1), 23-39.
[7] Easton, P. D. (2004). PE ratios, PEG ratios, and estimating the implied expected rate of return on equity capital.
The Accounting Review, 79(1), 73-95.
[8] Mahdi, M., & Khaddafi, M. (2020). The influence of gross profit margin, operating profit margin and net profit
margin on the stock price of consumer good industry in the Indonesia stock exchange on 2012-2014. International
Journal of Business, Economics, and Social Development, 1(3), 153-163.
[9] Home Improvement Research Institute. (2023). Home improvement spend outlook. HIRI.
https://www.hiri.org/blog/home-improvement-spend-outlook
[10] Moisio, R., Arnould, E. J., & Gentry, J. W. (2013). Productive consumption in the class-mediated construction of
domestic masculinity: Do-it-yourself (DIY) home improvement in men's identity work. Journal of Consumer
Research, 40(2), 298-316.
Proceedings of the Decoupling Corporate Finance Implications of Firm Climate Action - ICEMGD 2024
DOI: 10.54254/2754-1169/110/2024ED0120
186