Unit Four: Use the data for the year ended 1/30/2004 to make a budget for the year ended 1/28/2005

For this component of the project, an initial (income statement) budget for a single store is needed.

develop a single store budget for Lowe's, using sales growth assumptions based on historical movements in sales per store and using historical data on expenses as a percentage of sales. The Budgeting Example, in the Resources, using Home Depot data provides guidance on how to proceed.

If you have any questions, please contact your instructor.

Submit your budget?both the supporting spreadsheet and the explanation?to the assignment area.

Home Depot Income Statements 1/29/2006 1/30/2005 81,511 54,191 27,320 73,094 48,664 24,430 16,485 1,472 17,957 9,363 15,256 1,248 16,504 7,926 62 -143 -81 9,282 3,444 5,838 56 -70 -14 7,912 2,911 5,001 Weighted average common shares Basic earnings per share Diluted weighted average common shares Diluted earnings per share 2,138 2.73 2,147 2.72 2,207 2.27 2,216 2.26 Number of stores Capital expenditures Square feet Number of customer transactions Average ticket 2,042 3,881 215 1,330 57.98 1,890 3,948 201 1,295 54.89 0.45 40 0.265 40.41 Sales Cost of goods sold Gross profit Operating expenses Selling, general and administrative Depreciation and amortization Total operating expenses Operating income Interest income (expense) Interest and investment income Interest expense Interest, net Earnings before taxes Provision for income taxes Net income Annual dividends Stock price Home Depot Balance Sheets 1/29/2006 1/30/2005 2/1/2004 Assets Current assets Cash and cash equivalents Short term investments Receivables, net Merchandise inventory Other current assets Total current assets 793 14 2,396 11,401 742 15,346 506 1,659 1,499 10,076 533 14,273 1,103 1,749 1,097 9,076 303 13,328 Property and equipment, at cost Land Buildings Furniture, fixtures and equipment Leasehold improvements Construction in progress Capital leases Gross property and equipment Less accumulated depreciation and amortization Net property and equipment 7,924 14,056 7,073 1,207 843 427 31,530 6,629 24,901 6,932 12,325 6,195 1,191 1,404 390 28,437 5,711 22,726 6,397 10,920 5,163 942 820 352 24,594 4,531 20,063 Notes receivable Cost in excess of fair value acquired Other assets Total assets 348 3,286 601 44,482 369 1,394 258 39,020 84 833 129 34,437 Liabilities and Shareholders' Equity Current liabilities Short term debt Accounts payable Accrued salaries and related expenses Sales taxes payable Deferred revenue Income taxes payable Current installment of long term debt Other accrued expenses Total current liabilities 900 6,032 1,176 488 1,757 388 513 1,647 12,901 0 5,766 1,055 412 1,546 161 11 1,504 10,455 0 5,159 801 419 1,281 175 509 1,210 9,554 Long term debt - excluding current Other long term liabilities Deferred income taxes Total liabilities 2,672 977 1,023 17,573 2,148 871 1,388 14,862 856 653 967 12,030 120 7,287 28,943 409 -138 119 6,650 23,962 227 -108 119 6,184 19,680 90 -76 -9,712 26,909 -6,692 24,158 -3,590 22,407 44,482 39,020 34,437 Stockholders' Equity Common stock (par=0.05, authorized: 10,000; issued 2,401 as of 1/29/06, 2385 as of 1/30/05; outstanding 2,124 as of 1/29/06, 2,185 as of 1/30/05) Paid in capital Retained earnings Accumulated other income Unearned compensation Treasury stock, at cost (277 shares at 1/29/06 200 shares at 1/30/05) Total Stockholders' Equity Total liabilities and stockholders' equity Budgeting Example Step 1: Select a sales growth percentage based on historical data. Calculate the expenses as a percentage of the sales using historical data. Home Depot Standard Flexible Assumptions Sales growth (same store) CGS % SG&A % Depreciation % Interest, net % Tax rate Income Statements 3.00% (expected % growth) 66.58% 20.87% 1.71% -0.02% 36.79% 39.92 (actual sales for 2006) 66.58% 20.87% 1.71% -0.02% 36.79% Actual Budgeted Variance Prior year 1/29/2006 1/29/2006 1/29/2006 1/30/2005 Step 2: Estimate sales using the sales growth and estimate expenses using the expense percentages times the forecasted sales. Actual Budgeted Variance 1/29/2006 1/29/2006 1/29/2006 Sales Cost of goods sold Gross profit Operating expenses Selling, general and administrative Depreciation and amortization Total operating expenses Operating income Interest income (expense) Interest and investment income Interest expense Interest, net Earnings before taxes Provision for income taxes Net income 39.92 26.54 13.38 39.83 26.52 13.31 0.0829 0.0176 0.0653 38.67 25.75 12.93 39.92 26.54 13.38 39.92 26.58 13.34 8.07 0.72 8.79 4.59 8.31 0.68 8.99 4.32 -0.2411 0.0407 -0.2004 0.2658 8.07 0.66 8.73 4.19 8.07 0.72 8.79 4.59 8.33 0.68 9.01 4.33 -0.26 0.04 -0.22 0.26 -0.0320 0.2337 0.1002 0.1335 0.03 -0.04 -0.01 4.19 1.54 2.65 -0.04 4.55 1.69 2.86 -0.01 4.32 1.59 2.73 -0.03 0.22 0.10 0.13 Number of stores 2,042 -0.04 4.55 1.69 2.86 -0.01 4.31 1.59 2.73 1,890 0.00 (note, sales are set to equal) -0.04 0.04 Step 3: Use the same expense percentages although the sales forecast should be set equal to the actual sales amount. Step 4: Variances are calculated for each item as actual less budget. Professional Challenge Data Lowe's Income Statements Sales CGS Gross Profit Expenses SG&A Store Opening Costs Depreciation Interest Total Expenses Pre-Tax Earnings Tax Earnings from continuing ops Discontinued ops Net Income Additional Metrics Number of Stores Square Footage Number of Employees Average ticket price for customers Shares outstanding LT Assets Land Building Equipment Estimated cost for one store Net working capital for one store Tom Steiner Consulting ### ### ### ### 1/28/2005 36,464 24,208 12,256 1/30/2004 30,838 21,269 9,569 1/31/2003 26,112 18,164 7948 ### # # # ### ### ### ### ### ### 7,562 123 859 176 8,720 3,536 1,360 2,176 0 2,176 5,578 128 739 180 6,625 2,944 1,115 1,829 15 1,844 4,625 129 640 182 5,576 2,372 893 1,479 12 1,491 ### # ### ### # 1,087 124 161,964 63.43 774 952 109 147,052 59.21 787 828 95 120,692 56.80 782 ### ### ### ### ### 4,197 7,007 5,405 19.77 1.15 3,635 5,950 4,355 16.55 2.44 3,133 5,092 3,663 Page 1 06/17/2017 Lowe's Balance Sheet ### 1/28/2005 1/30/2004 1/31/2003 Assets Current Assets Cash & Equivalents ST Investments Accounts Receivables Merchandise Inventory Def Inc Taxes Other CA Total current assets Net PPE LT Investments Other Assets ### ### # ### ### ### ### ### ### ### 530 283 9 5,911 95 75 6,903 13,911 146 178 1,446 178 131 4,584 59 289 6,687 11,945 169 241 853 273 172 3,968 58 244 5,568 10,352 29 160 Total Assets ### 21,138 19,042 16,109 ## # ### ## ### ### ### ### ### ### ### ### ### ### 0 630 2,695 0 386 467 539 931 5,648 3,060 736 159 9,603 11,535 0 77 2,366 74 335 0 0 1,516 4,368 3,678 657 30 8,733 10,309 50 29 1,943 88 306 0 0 1,162 3,578 3,736 478 15 7,807 8,302 Total Liabilities and Shareholder Equities ### 21,138 19,042 16,109 Liabilities and Shareholder Equity Current Liabilities Short term borrowings Current LT Debt Accounts Payable Employee retirement plans Accrued salaries and wages Self Insurance liability Def Revenue Other current liabilities Total current liabilities LTD Def Inc Taxes Other LT Liab Total Liabilities Total Shareholder Equity Tom Steiner Consulting Page 2 06/17/2017 Home Depot, Inc. 01/29/2006 01/30/2005 02/01/2004 Us USdollars dollars US dollars Cash ### 506,000 2,826,000 Marketable securities ### 1,659,000 26,000 Receivables ### 1,499,000 1,097,000 Inventories ### 10,076,000 9,076,000 Raw materials ## 0 0 Work in progress ## 0 0 Finished goods ### 10,076,000 9,076,000 Notes receivable ## 0 0 Other current assets & prepaid expenses ### 533,000 303,000 Total current assets ### 14,273,000 13,328,000 Property, plant & equipment ### 28,437,000 24,594,000 Accumulated depreciation ### 5,711,000 4,531,000 Net property, plant & equipment ### 22,726,000 20,063,000 Investments & advances to subsidiaries ## 0 0 Other non-current assets ### 369,000 84,000 Deferred charges & income ## 0 0 Intangibles ### 1,412,000 833,000 Deposits & other assets ### 240,000 129,000 Total assets ### 39,020,000 34,437,000 Notes payable Accounts payable Current long term debt Current portion of cap leases Accrued expenses Income taxes Other current liabilities Total current liabilities Mortgages Deferred charges/income Convertible debt Long term debt Non-current capital leases Other long term liabilities Total liabilities Minority interest (liabilities) Other liabilities Shareholder Equity Total liabilities & net worth Tom Steiner Consulting 01/29/2006 01/30/2005 Us dollars US dollars ### 0 ### 5,766,000 ### 1,000 ### 10,000 ### 2,971,000 ### 161,000 ### 1,546,000 ### 10,455,000 ## 0 ### 1,388,000 ## 0 ### 1,807,000 ### 341,000 ### 871,000 ### 14,862,000 ## 0 ### 119,000 ### 24,039,000 ### 39,020,000 Page 3 02/01/2004 US dollars 0 5,159,000 502,000 7,000 2,430,000 175,000 1,281,000 9,554,000 0 967,000 0 545,000 311,000 653,000 12,030,000 0 14,000 22,393,000 34,437,000 06/17/2017 Home Depot, Inc. 01/29/2006 01/30/2005 Us dollars US dollars Net sales ### 73,094,000 Cost of goods ### 48,664,000 Gross profit ### 24,430,000 R & D expenditures ## 0 Sell, general & admin expenses ### 16,504,000 Income before depreciation & amortization### 7,926,000 Depreciation & amortization ## 0 Non-operating income/expense ### 56,000 Interest expense ### 70,000 Income before tax ### 7,912,000 Provision for income taxes ### 2,911,000 Minority interest ## 0 Investments gains/losses ## 0 Other income ## 0 Net income before extra items ### 5,001,000 Extra items & discontinued ops ## 0 Net income ### 5,001,000 Tom Steiner Consulting Page 4 02/01/2004 US dollars 64,816,000 44,236,000 20,580,000 0 13,734,000 6,846,000 0 59,000 62,000 6,843,000 2,539,000 0 0 0 4,304,000 0 4,304,000 06/17/2017 Ratio Analysis Performance Ratios ROE ROA PM ROE Decomposition PM TAT EM Lowe's Lowe's Home Depot ( 2 / 3 / 2 0 0 6 )(1/28/2005) 1/30/2004) (1/31/2003) (1/29/2006) ### ### ### ### ### ### Asset Management Inventory Turnover Inventory Days Average Collection Period Total Asset Turnover ### ### ### ### Liquidity Ratios Current Ratio Quick Ratio ### ### Debt Ratios Debt Ratio Equity Multiplier ### ### Tom Steiner Consulting Lowes Lowe's Page 5 06/17/2017 Home Lowe's Lowe's Depot (2/3/06) (1/28/05) (1/29/06) ROE PM TAT EM 10 9 8 7 6 5 4 3 2 1 0 Lowe's (2/3/06) Lowe's (1/28/05) Hom e Depot (1/29/06) ROE 10 9 8 7 6 5 4 3 2 1 0 Lowe's (2/3/06) Lowe's (1/28/05) Hom e Depot (1/29/06) PM 10 9 8 7 6 5 4 3 2 1 0 Lowe's (2/3/06) Lowe's (1/28/05) Hom e Depot (1/29/06) TAT 10 9 8 7 6 5 4 3 2 1 0 Lowe's (2/3/06) Lowe's (1/28/05) Hom e Depot (1/29/06) EM Tom Steiner Consulting Page 6 06/17/2017 Breakeven Analysis ### 1/28/2005 1/30/2004 1/31/2003 Cost Type Stores Sales CGS Gross Profit Expenses SG&A Store Opening Costs Depreciation Interest Total Expenses Pre-Tax Earnings Tax Earnings from continuing ops Discontinued ops Net Income ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### 1,087 33.5455 22.2705 11.2751 0.0000 6.9568 0.1132 0.7902 0.1619 8.0221 3.2530 1.2511 2.0018 0.0000 2.0018 952 32.3929 22.3414 10.0515 0.0000 5.8592 0.1345 0.7763 0.1891 6.9590 3.0924 1.1712 1.9212 0.0158 1.9370 Average ticket price per transaction (P) Transactions per store (Q) - millions Variable expenses per transaction (VC) Fixed expenses (FC) Break Even Sales Customer Transactions ## 63.43 59.21 56.80 ### 0.52885919 0.54708423 0.48289738 ### ### Lowes 828 27.4286 19.0798 8.3487 0.0000 4.8582 0.1355 0.6723 0.1912 5.8571 2.4916 0.9380 1.5536 0.0126 1.5662 Calculate Tom Steiner Consulting Page 7 ### ### 06/17/2017 Graphical Breakeven Analysis Breakeven Analysis for Sales Unit Sales Sales 0.3000 0.3250 0.3500 0.3750 0.4000 0.4250 0.4500 0.4750 0.5000 Variable Fixed Total Expenses Expenses Expenses Breakeven Sales Level 12 Sales Variable Expenses Fixed Expenses Total Expenses 10 8 6 4 2 0 0.3000 0.3250 0.3500 0.3750 0.4000 0.4250 0.4500 0.4750 0.5000 Units (millions) Tom Steiner Consulting Page 8 06/17/2017 Budget for a Lowe's Store Plan for 2005 Actual for 2005 Variance Lowe's Sales CGS Gross Profit Expenses SG&A Store Opening Costs Depreciation Interest Total Expenses Pre-Tax Earnings Tax Earnings from continuing ops Discontinued ops Net Income Tom Steiner Consulting Page 9 06/17/2017 Capital Budgeting Model Assumptions 2004 Percentage of sales 2004 2003 Growth in Sales Stores Sales CGS Gross Profit Expenses SG&A Store Opening Costs Depreciation Interest Total Expenses Pre-Tax Earnings Tax Earnings from continuing ops Discontinued ops Net Income Estimated cost for one store Net working capital for one store Total cost for one store LT Growth assumption WACC NPV PV Inflows PV Outflows 2% 9.5% Estimation of Cash Flows 2005 2006 2007 2008 2009 Sales CGS SG&A Depreciation OCF Additional Cap NWC Additional NWC FCF V2009 Develop WACC 0.095 Valuation of Cash Flows 2005 2006 2007 2008 2009 Present Value of Inflows Present Value of Outflows NPV Tom Steiner Consulting Page 10 06/17/2017 Sales growth (same store) PV inflows PV outflows Value and Cost Sensitivity Analysis on Capital Budgeting Model Sensitivity of Project Value on Sales Growth 12 PV inflows PV outflows 10 8 6 4 2 0 Sales Growth (same store) PV inflows PV outflows Value and Cost CGS % Sensitivity of Project Value on CGS % 12 PV inflows PV outflows 10 8 6 4 2 0 CGS % Tom Steiner Consulting Page 11 06/17/2017