Consumers are becoming more and more socially conscious, and they want the goods and services they use to measure up. It doesn't take much. A simple action that costs a company very little or nothing at all can make a real difference in the mind of the consumer, and the company's bottom line.
Home Depot (NYSE: HD ) might not be the first company you think of when you hear the words "corporate social responsibility," but the company has a strong track record in that arena. Let's dive deep into the home-improvement stalwart, evaluate its socially conscious policies and practices, and take a hard look at the numbers. We'll analyze the company in terms of it's performance as a socially conscious enterprise, as a business, and as an investment.
Saving the rainforests, one 2-by-4 at a time
"As a renewable resource, wood must be harvested in a sustainable manner. The Home Depot monitors its lumber purchases to ensure sustainability." So states the headline on Home Depot's Eco Options website, a fully blown-out, separate site that promotes the various ways the company works to operate in a green fashion, along with eco-friendly tips for the do-it-yourselfers.
Home Depot's flagship green program is its FSC-certified-wood program. FSC stands for "Forest Stewardship Council," an environmental group founded in 1993 to promote sustainable forestry around the world. Home Depot was the first national retailer to carry FSC-certified wood, which it began doing in 1994. Since then, the company has led the home-remodeling industry in sustainable-wood sourcing. Specifically:
- More than 94% of the wood Home Depot sells comes from responsibly managed domestic forests.
- Of the wood sourced from South American forests, 84.6% is pine and eucalyptus, harvested from responsibly managed plantations.
- Less than 0.15% of Home Depot's wood comes from rainforests.
With an increasing domestic and international population, the resulting need for more housing that goes along with it, and the immense amount of lumber Home Depot sells to pros and amateurs alike, the company can make a real difference in the state of the world's forests by remaining a dedicated supplier of responsibly managed wood.
New house, anyone?
With its green credentials now firmly established, let's look at a few basic metrics and see how Home Depot rates as a business and an investment against its peers.
Revenue growth: In its most recent quarter, Home Depot grew its revenue by 2% year over year -- nothing to write home about, but still better than Lowe's (NYSE: LOW ) and its 2% decline in the same period. Much of this poor performance can be chalked up to anemic U.S. growth in general, and a housing market that is just barely beginning to crawl out of the abyss in particular.
For a bit of a broader comparison, with retailers that move their fair share of home-improvement merchandise, Costco (Nasdaq: COST ) , Target (Nasdaq: TGT ) , and Wal-Mart (NYSE: WMT ) grew at only 8%, 5%, and 3% respectively: better than either Home Depot or Lowe's, for sure, but only by virtue of the fact that they're far more diversified in what they sell.
Earnings growth: Out of that 2% revenue growth, Home Depot heroically managed 12.4% YOY earnings growth for the same period, versus the 10% earnings loss at Lowe's. Costco grew its earnings a big 19.1% for this time period, and Wal-Mart a less-than-big but respectable 5.7%.
Cash-to-debt ratio: It's always good to see more cash than debt on the balance sheet, ideally at least 1.5 times more.
- With $2.8 billion in cash and $10.8 billion in debt, Home Depot's C/D is a disappointing 0.26.
- With $2.3 billion in cash and $9.6 billion in debt, Lowe's C/D is a similarly disappointing 0.23.
- With $1.4 billion in cash and $18.5 billion in debt, Target has a C/D worse than either Home Depot or Lowe's: 0.08.
- With $7.9 billion in cash and 54.3 billion in debt, Wal-Mart's C/D of 0.15 is the worst of all.
With money as cheap as it is, lots of companies are highly leveraged these days. At least interest payments are low, but operating under a potentially crushing debt load is never great.
Price-to-earnings ratio: Home Depot's P/E of 20.4 does put it at the upper end of the average P/E range for publically traded American companies, and it also makes it slightly more expensive than Lowe's, with its P/E of 18.7, but not radically so on either count.
Making money while making a difference
A lot of companies pay lip service to the notion of corporate social responsibility but then leave it at that. Home Depot is performing well as a for-profit enterprise and seems genuinely committed to its green programs as well. Are any companies perfect in this regard? No. But to paraphrase Voltaire, it's important to never let the quest for the perfect drive out the good.
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