Home Depot Inc, plays a significant role in the American retail industry as it is one of the largest and most successful. With this position in the industry, it is safe to say the Home Depot is heavily influenced by any changes in the economy or in the world as politics and the policies that the federal government may pass could have a direct or indirect effect on Home Depot’s success or failure. For example, some policies that can have the most effect on the company include, trade policies which by itself have a large influence on the products that Home Depot sells as most of the goods could be coming from foreign countries. Second, there is immigration policy which affect both the company internally and its profitably in terms of its sales. For one thing, immigration policy is directly affecting Home Depot’s ability to hire skilled or unskilled employers due to strict federal work verifications that can limit new hires or bring large penalties to the company. The next factor would be international investment policies which affect Home Depot in two different ways. On one side there is the ability for Home Depot to attract new investor to increase its funds for maintaining a competitive edge in the market. In addition to for Home Depot to be able to be treated equally among other competitors when seeking out new partnerships or investments abroad. And finally, there the effect that Fiscal and Monetary policies have on Home Depot and its bottom line.
Taking a look at the finances of Home Depot we see that they have been experiencing increasing revenues for the last couple of years in addition to new stores being built. This results in Home Depot expanding and having a bigger market share than their competitors such as Lowe’s. According to Home Depot’s annual income statement, they have a total revenue of $100,904,000 and an operating cost of $66,548,000, leaving them with a gross profit of $34,356,000. On the other hand, Lowe’s, a major competitor to Home Depot, has a total revenue of $68,619,000 and operating cost of $45,210,000 which leaves Lowe’s with the gross profit of $23,409,000. It is important to mention that although Lowe’s has significantly less total revenue when compared to Home Depot, Lowe’s has also been seeing a increase in their revenue over the years. The higher amount of gross profit that Home Depot has over Lowe’s leaves them with a better chance of reinvestment in themselves and also expanding Home Depot to new markets domestically and internationally. This helps Home Depot maintain its market share over its competitors such as Lowe’s.
Beginning first with Trade policies and their effect on Home Depot, we see that the current rounds of tariffs being announced by President Trump stand to raise the price of some foreign goods in order to protect domestic goods. Home Depot receives a large amount of their products from foreign manufacturers. Certain trade policies have led to more foreign goods being sold in the United States than domestic goods which hurts the manufacturing base here. Home Depot on the other hand could stand to lose in case of a trade war with foreign nations such as China as they represent a large portion of the goods that Home Depot sells in its stores. Trade policies that increase tariffs could lead to higher prices in Home Depot’s stores which can translate to lower sales. On the other hand, if trade policies favored even more free trade, Home Depot could stand to gain as prices would lower in the wake of more supply and possible less regulation on the goods being sold. When examining Home Depot’s competitors such as Lowe’s, it is revealed that Lowe’s faces a similar faith and could actually perform worse than Home Depot for the reason that Lowe’s has a smaller market share and is not able to buy their supplies at a competitive cost as Home Depot does. Lowe’s smaller size decreases their negotiating power when talking with international suppliers about how much they will be pay for their goods.
Although Home Depot will pay more for their goods because of a trade war, they will be in a better negotiating position then smaller firms such as Lowe’s. That is due to the amount of Home Depot’s purchasing power due to their massive store empire across many different markets. In fact, it can be said that the more they buy, the better deal they’ll get. In the next three years we could see Home Depot gain more sales through more trade with the rest of the world. That is because of the potential to buy their supplies at a lower price from foreign vendors, which will then allow the consumer to benefit from the lower sale price. Which in all, can lead to increase sales volumes as more people can afford to spend on home improvement. What Home Depot can do in this scenario is to have more meetings with their suppliers to lock in a lower price that will compensate for any higher tariffs that can placed on it. Since both parties want to continue trading, it is in the best interest of Home Depot and its suppliers to agree to a fair price that would minimize the price shock to consumers which can lead to steady sales throughout a trade war.
Equally important is the current state of immigration policy which directly affects the workforce in the United States. That is, when Home Depot wants to hire new and highly skilled workers, current immigration policy could hindle that from happening. Furthermore, the part of immigration policy that currently requires workplace employment verification could discourage or just make it harder to hire and keep desired workers for Home Depot. On the other hand, immigration policies can have a different effect on retailers such as how the Hispanic community in the U.S. is facing increased levels of fear. This is due to the current increased immigration enforcement being carried out throughout the U.S. which encourages some shoppers from those communities from going out to buy essential goods. This is more likely to affect stores that are in predominate Hispanic areas of the country. As people in those communities will stay home rather than risk being caught in an immigration sweep while shopping at any major retailer such as Home Depot.
This has all lead to a decrease sale being seen for the first time as more people are holding back on major purchases or investments such as any home improvement which would be fulfilled by retailers like Home Depot. This stands to hurt Home Depot’s competition even more as firms such as Lowe’s have the same customer base and could lose an equal number of customers and potential employees if strict immigration laws are put in place. When looking at the next few years, we can see that the immigration policy will intensify its enforcement if the current administration continuous on their current agenda. Home Depot should expect greater difficulty in finding highly skilled foreign workers to hire along with a lower number of immigrants wanting to spend large amounts if they feel their time in this country may be in jeopardy. In either case, the situation brought on by the U.S.’s immigration policy will continue to be a negative in the eyes of retailers such as Home Depot. What Home Depot can do to survive this challenge is to go on a public relations campaign to earn the trust of the community to ensure that Home Depot is a safe place to shop no matter the outcome of governmental policies. Their focus should be to sell the goods that are needed for home improvement and that’s what they should get the customer base to focus on as well.
International investment has its own significant influence on Home Depot as we have seen how trade policies can play a toll on the company as a whole. There are many other investment variables that should be considered to decide what are the strengths and weaknesses of Home Depot. In the same light we see that the current practices of Home Depot in which the company has been paying back its stockholders through dividends has helped increased its likeability among international investors as they see a company that is stable and is profitable enough to bring a return on their investment. On the other hand, Lowe’s has not received the same optimism that Home Depot has when dealing with international investments. That is because Lowe’s and similar firms like it represent a smaller market share and therefore is not as attractive as an investment when compared to Home Depot which represents a larger share and is more recognizable among consumers. There are also plans in the works right now that Home Depot has to use their excess cash to repurchase its shares to gain back more control of company. Further proving that Home Depot is on the right track to remain a large influence in the retail world. Another strength that Home Depot has over its competitors is that the company has a solid merchandising strategy that has helped the company increase its share of the market along with its profits. Moreover, when analyzing how consumers investments has played its own role in their success, we see that consumers are spending more on home improvements and are choosing to purchase their goods from Home Depot over other competitors. This could be because Home Depot is focused on fulfilling every part of the home improvement world. On the other side it has adjusted its supply logistics by partnering with the right suppliers that bring the best of both quality and price that help Home Depot gain a competitive edge against other retailers. All this, in addition to Home Depot’s favorable finances is helping Home Depot overcome any challenges posed by international investors when they choose to invest in Home Depot or not.
On the other hand, Home Depot does have some weaknesses in its investments being made at the moment. This includes the risk involved with its sales that are heavily reliant on their consumers desire to purchase on home improvements which usually constitute a large portion of a family’s budget. That being said, relying on consumers for a majority of their sales represents an uncertain risk as the economic outlook can change which can push people to delay any major projects that they may have for their home. This downward demand outlook will translate to lower sales and its timeline could significantly hurt Home Depot as they will have to wait for consumer confidence to rise again. This is where people feel safe about their job or their other investments.
This is due to the fact that most people investing in their home do so knowing that they will be living in the home for a long amount of time. Another negative that Home Depot faces is resulting from the Federal Reserve bank’s decision to raise interest rates. A raise in interest rates can lead to a lower demand for loans from consumers, and overall, less large spending. That is due to the trend that a large portion of consumers rely on credit when making a major purchase or investment in their home. An increase in the interest rate will make borrowing that money more expensive to pay back which will persuade people to delay or scale down the amount of money they were likely to spend at a place like Home Depot. This will also hurt all of Home Depot’s competitors as it will make it increasingly difficult to offer credit to consumers who are pushed away by the higher interest rates. Which in result could lead to lower sales across the industry. What Home Depot can do to come out on top of this challenge posed by the Federal Reserve is to offer their own line of credit to consumers at a more favorable rate in order to maintain the access to the credit that consumers need to make large improvement projects which Home Depot caters to. In the end, the economy stands to continue its upward trend and Home Depot will most likely gain in market share as people’s confidence and income rise.
Another important factor that greatly affects Home Depot is the Fiscal and Monetary policies taken by the United States in recent years. Even more so, we have seen the current administration embark on a tax cut initiative that has led to the drastic change in the nation’s tax code which led fiscal policy to lower the taxes on individuals and businesses. That being said, many now believe that due to the tax cuts that have passed more money would be in the hands of the consumers and produces which should result in a boost to the economy. Home Depot stands to gain a sizable increase in its profits as on one side, it is anticipated that more people would commit to home improvement projects due to the savings they received from the tax cuts.
In addition, Home Depot itself is expected to save million from the cut in the corporate tax rate which will lead investors to see an increase in the value of the company’s stock. Due to the federal tax cuts Home Depot’s tax rate moved from 37 percent to 23 percent which also includes state and local taxes. This is the same tax rate that Home Depot’s competitors were granted. Although Lowe’s and other firms face a lower tax rate, it is the amount of savings that can determine who stands to benefit the most. In this case it will be Home Depot as the company will have a greater amount of funds saved from the tax cuts that would be available to reinvest it in the company. Other firms would have the chance to do the same but with a smaller amount of funds. This dramatic lowering of the tax rate can help unleash new investment in the company and can see Home Depot expand its operations into new towns or regions that have been held back due to funds.
Not to mention that Home Depot’s annual income has increased to $2 billion. What remains for Home Depot to do is to commit to using the increase in savings to be spent on maintaining its competitive edge in the marketplace or even expanding to new areas.
Furthermore, it is not only the corporation and its investors that stand to gain from these tax cuts, but also the employees who are expected to receive up to $1000 each in a bonus being given out to every Home Depot employee because of the tax cuts. Although this looks to benefit the employees in a generous way, the reality is that very few of Home Depot’s employees will actually see a $1000 bonus due to Home Depot’s requirement that the recipient of the full $1000 be a 20-year employee or more. This severely cuts down on the number of employees that will be receiving the bonus and instead only feeds the perception that Home Depot is only announcing the bonuses as a public relations stunt to gain favorable support while in reality only benefitting a select few of their employees. As much as this may hurt Home Depot’s employee tenure as employees may leave to seek out other employers, the company still has the opportunity to use the tax cuts to improve itself both as a business and as an employer where the consumer is inclined to go to Home Depot and where employees feel they can stay and invest in their career with a company that will invest in them. Not to mention that the next three years of monetary and fiscal policy can bring even greater challenges when the economy maintains itself at full employment and government spending continues to rise which will rise suspicion of the debt to GDP ratio. In addition to the chance for higher interest rates being announced which will lead to a decrease in borrowing rates and therefore, less spending.
References
- Hiltzik, Michael. “Home Depot’s Bonuses Underscore What Workers Get out of the Corporate Tax Cut:” Los Angeles Times, Los Angeles Times, 30 Jan. 2018,
- Kramer, “How Tax Cuts Could Boost Home Depot’s Stock.” Investopedia, Investopedia, 1 Dec. 2017
- Naidu, “U.S. Retailers Hit as Immigration Worries Weigh on Hispanic Spending.” Reuters, Thomson Reuters, 24 Aug. 2017,
- Reports, From Staff and “Trump Orders Stiff Trade Tariffs, Unswayed by Grim Warnings.” High Plains Journal, 19 Mar. 2018,
- “Annual Report 2017.” The Home Depot.
- “Lowe’s Income” NASDAQ.com, 12 Mar. 2018, www.nasdaq.com/symbol/low/financials?query.
- “Lowe’s Companies Inc Effective Tax Rate by” Lowe’s Companies Inc (LOW) Effective Tax Rate Starting from the Fourth Quarter 2017 to Fourth Quarter 2016, Profitability Trends and Ranking, Fundamental Ratios – CSIMarket,
Comments
It is an informative report about Home Depot, which is one of the most successful retail chains, that sells 1) construction products 2) tools and 3) services, to improve or renovate the home. Home Depot sells both national and international products, which implies that changes in trade policy may affect pricing and stocks of various products (that are sold at Home Depot). Since the Great Recession, United States’ trade deficit has been a popular subject, which also influenced presidential campaigns of 1) Donald Trump and 2) Hillary Clinton. Both the candidates asserted that if they came to power, they would revisit trade deals,
Now when in Donald Trump is in power, he is altering trade terms and policies to reduce the trade deficit with major trading partners, such as China. The report mentions that imposing of tariff on certain foreign goods may trigger a trade war, which would directly affect Home Depot and American consumers. It is true that because of the trade, American markets have become more competitive and consumer surplus has increased. However, it is also true that de-industrialization has occurred in the United States because of the trade deficit.
I agree that because of the changes in economic and trade policy, Home Depot will get affected. However, Home Depot, which is United States’ one of the most successful retail store chains, has the structural and financial capacity to ensure various kinds of economic/financial shocks that could be the result of alteration in political-economic policies.
As per my understanding, changes in trade policy will not affect (adversely) Home Depot’s revenue or financial performance, as American products will replace international products, which will be slightly more expensive than international products and services. However, it is true that American industries and markets will become less competitive and this would slow down the process of Industrial Innovation. As companies prefer to invest in stable companies that earn a high profit; therefore, Home Depot will continue to attract sizeable investments.
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