1. Who deserves the “Management of the Year” award in the retail building-supply industry?

2. How does the Home Depot forecasting model work? Why do we use ratios to forecast financial statements?

3. How sensitive is the ROC to changes in the forecast assumptions?

4. What do you think of Galeotafiore’s forecast for Home Depot?

5. What should Galeotafiore’s forecast for Lowe’s be?

This case follows the performance-review and financial-statement forecasting decisions of a Value Line analyst for the retail building-supply industry in October 2002. The case contrasts the strong operating performance of Home Depot with the strong stock market performance of Lowe’s. Students examine a financial ratio analysis for Home Depot that acts as a template to generate a comparable ratio analysis for Lowe’s. Students’ designed the ratio analysis to build intuition with respect to interpreting individual ratios as well as ratio inter-relationships (e.g., the DuPont framework). The historical performance comparison suggests that investors are skeptical of the ability of Home Depot to maintain its performance trajectory, yet projects sustained improvements for Lowe’s. Students can scrutinize the analyst’s five-year income statement and asset-side balance sheet forecast for Home Depot. The case expressly focuses on the asset side of the balance sheet as a preview for other cases using free cash flow forecasting. The Home Depot forecast exercise exposes students to the mechanics of financial statement modeling and sensitivity analysis, which they can use in building their own forecast for Lowe’s. Finally, the strong growth assumptions for Home Depot relative to the modest growth forecast for the industry suggest that the company will capture massive and perhaps unreasonable market share in the near term. The exercise provides a striking example of the importance of comparing bottoms-up business forecasting with top-down industry forecasts.