Project
Clayton State University
SCML 4170 - Financial Issues in Supply Chain Management Project
Using the DuPont Model to Analyze Corporate Performance
The DuPont model is a simple financial management tool that allows managers to make quick and
effective comparisons between two business states, using established financial measurement data.
For example, a company can compare two fiscal years to determine if the current strategic plan
execution is performing as expected. An analyst can compare two competitors to determine
financial and managerial strengths and weaknesses. An executive can compare company
performance before and after a major project to determine the project’s financial impact. These
DuPont model uses are illustrated using publically available data from home improvement retail
giants Home Depot and Lowe’s.
Home Depot Performance in 2009 and 2010
Home Depot is the second-largest US retail company (behind Wal-Mart), and the largest home
improvement retailer. It is also the largest home improvement retailer in Canada and Mexico. The
company had 224 stores at the end of its fiscal year 2010, including 1976 in the United States and
Puerto Rico, 179 in Canada, 79 in Mexico, and 10 in China. Home Depot is nearly 50% bigger (by
sales) than its closest competitor in home improvement, Lowe’s. Despite its dominant position in
the home improvement retail industry, the company is open to risk from national and global
economic conditions. It experienced hardships during the recent housing, financial, and general
recessionary environment that began in late 2007 and the company took appropriate measures to
maintain its fiscal dominance. The DuPont model comparison for Home Depot fiscal years (FY)
2008 and 2009, illustrated in Figure 1, reveal the company’s pressures and its responses to those
pressures.
Figure 1: Home Depot FY 2008 and 2009 DuPont Model Comparison
Sales. FY09 sales dropped $5.11 billion (7.2%) from FY08, reflecting several changes. The
company caters to three types of customers: do-it-yourself (DIY), do-it-for-me (DIFM), and
professional. Housing construction dropped as the industry continued in a major recession,
negatively affecting professional services (twice as large as DIY and DIFM at Home Depot).
Existing-home improvement projects fell as national unemployment rose toward its highest level
in nearly 20 years, negatively affecting DIY and DIFM customers. Home owners who did not lose
their jobs began to focus more on debt reduction and savings; large declines in home prices made
home upgrades less appealing. Home Depot also continued a move back to its core competency of
retail sales, exiting non-core businesses including EXPO, THD Design, Yardbirds, and HD Bath,
to focus on HD stores. The majority of these businesses closed in FY08 and the remainder closed
in FY09, accounting for lower revenues in each of those years compared to prior years.
Cost of sales. The difference in COS ($3.5 billion less in FY09) likely resulted from the net effects
of lower sales in FY09 (by more than $5 billion), charges for restructuring costs ($951 million in
FY09 charged as an operating loss versus $146 million in FY08), inventory markdowns, the
implementation of a new enterprise resource planning (ERP) system in Canada in FY09, and the
associated change in inventory accounting practices the new system brought. Home Depot in FY09
Using the DuPont Model to Compare One Company, Two Fiscal Years Fiscal Year Ending 2010 compared to FY Ending 2009
Company HD FY 2009
HD FY 2008 All numbers in Millions ($USD) SALES
66176
GROSS PROFIT 71288
22412
NET PROFIT 23990 COST OF
4803 GOODS SOLD
NET PROFIT 4359 43764
MARGIN TOTAL EXPENSES 47298
7.26% SALES 17609
6.11% 66176 19631
71288
RETURN ON FINANCIAL RETURN ON
EQUITY LEVERAGE ASSETS
24.77% 2.108 11.75% INVENTORY
24.52% 2.286 10.73% 10188
SALES 10673
ASSET 66176 CURRENT ASSETS
TURNOVER 71288 13900
1.6 12837 ACCOUNTS
1.8 TOTAL RECEIVABLE
ASSETS 964
40877 FIXED ASSETS 972
40639 26977
27802
OTHER
CURRENT
ASSETS
2748
1192
managed to contain its COS to 66.1% of revenue, versus 66.3% in FY08.
Total expenses. Total expenses were down in FY09 by nearly $2 billion. This reduction is likely
due in part to the more effective ERP system, a net reduction of 7,000 salaried employees in FY09
(from internal restructuring activities to better align functional areas with store sales support), and
reduced lease obligations from closing underperforming stores.
Profit. Gross profit was down in FY09 by $1.5 billion due to the $5 billion revenue decrease from
FY08, but net profit was up $500 million in FY09 due to the company reducing its operating,
SG&A, and total expenses, better inventory management, and the EXPO store closings.
Consequently, net profit margin was more than 110 basis points better in FY09 compared to
FY08.This result reflects Home Depot senior management’s push to return the company to its
roots as a home improvement store.
Asset turnover. This ratio decrease to 1.6 from 1.8 in FY09, reflecting the decrease in revenue and
a $1.1 billion increase in other assets, including cash and cash equivalents. The company lost
ground in its efforts to generate revenue from its assets.
Return on assets (ROA). This measure increased more than 100 basis points in FY09, reflecting
the company’s focus on cost reduction and inventory accountability.
Financial leverage. Financial leverage decreased slighted, to 2.11 from 2.29, in FY09, likely due
to Home Depot’s sale of non-core businesses, closing of non-profitable stores, and slowdown in
new-store opening relative to FY08.
Return on equity (ROE). In FY09, Home Depot increased return on equity by 25 basis points over
FY08, to 24.77%. This result indicates that the company is improving its ability to generate profits
for the money its shareholders invest. Shareholders rewarded the company with an increase in
stock price from 2008 through 2009.
Comparing Home Depot and Lowe’s 2010 Performance
Lowe’s is the second largest home improvement retailer behind Home Depot, with 1710 stores in
the US and Canada. Through most of the last decade, Lowe’s grew at a faster rate than Home
Depot, although it has also been affected by the current 2-year economic downturn. A comparison
of Lowe’s and Home Depot using the DuPont Model (illustrated in Figure 2) reveals that the
smaller rival is not using its money as effectively as its market leader.
Figure 2: Home Depot and Lowe’s FY09 DuPont Model Comparison
Sales. Lowe’s FY09 sales was $18.96 billion lower than Home Depot’s sales. The most likely
reason is that, while both companies sale similar products (approximately 40,000 SKUs each) to
similar market segments, Lowe’s 1710 stores average 75,000 ft2 compared to Home Depot’s 2244
stores at 105,000 ft2 each.
Net margin. Lowe’s does a better job with its cost of sales relative to revenue (65.1% versus 66.1%
for Home Depot), but its total expenses as a function of revenue is much higher (28.89% versus
26.61% for Home Depot). So, the Home Depot does a better job keeping its SG&A and other costs
low, resulting in a higher net profit margin (7.26% versus 5.98% for Lowe’s.)
Asset turnover. Despite having nearly 50% less sales and hundreds fewer (and smaller) stores,
Lowe’s has just 19% less inventory and 78% less accounts receivable than Home Depot. Lowe’s
fixed assets, while lower than Home Depot’s, are high relative to sales. Consequently, Lowe’s
asset turnover is lower than its rival, indicating that Lowe’s is less successful than Home Depot at
converting assets to revenue.
Return on assets and equity, and leverage. Lowe’s ROA (8.56%) is lower than Home Depot’s
Using the DuPont Model to Compare Two Competing Companies Fiscal Year 2009 (Feb 2009-Jan2010)
Company Lowe's
Home Depot All numbers in Millions ($USD) SALES
47220
GROSS PROFIT 66176
16463
NET PROFIT 22412 COST OF
2825 GOODS SOLD
NET PROFIT 4803 30757
MARGIN TOTAL EXPENSES 43764
5.98% SALES 13638
7.26% 47220 17609
66176
RETURN ON FINANCIAL RETURN ON
EQUITY LEVERAGE ASSETS 14.81% 1.731 8.56% INVENTORY
24.77% 2.108 11.75% 8249
SALES 10188
ASSET 47220 CURRENT ASSETS
TURNOVER 66176 9732
1.4 13900 ACCOUNTS
1.6 TOTAL RECEIVABLE
ASSETS 208
33005 FIXED ASSETS 964
40877 23273
26977
OTHER
CURRENT
ASSETS
1275
2748
ROA (11.75%), reflecting its weaker position on cost management and asset management. Lowe’s
financial leverage (1.73) is also lower than Home Depot’s leverage (2.11), indicating that Lowe’s
is using less external money to grow. Having less debt is not always a bad thing, but Lowe’s ROE
(14.81%) is nearly 10 percentage points lower than Home Depot’s ROE (24.77%), indicating that
Lowe’s does less to generate returns with its shareholders’ money than its larger orange
competitor.
Conclusion
The DuPont model was used to conduct two situational analyses of home-improvement retailers
using available (and in one case, fictional) data: 1) comparing two fiscal years for a single
company, and 2) comparing two competitors to determine financial and managerial strengths and
weaknesses. The DuPont model is a simple financial management tool for managers to make quick
and effective comparisons between two business states, using established financial measurement
data.
References
Home Depot, Inc. (2010). Home Depot 2010 10-K Report [Data file]. Retrieved from
http://www.sec.gov/cgi-bin/viewer?action=view&cik=354950&accession_number=0001193125-
10-067178&xbrl_type=v
Lowe’s, Inc. (2010). Lowe’s 2010 10-K Report [Data file]. Retrieved from
http://www.sec.gov/cgi-bin/viewer?action=view&cik=60667&accession_number=0000060667-
10-000064&xbrl_type=v