During 1985 The Home Depot implemented its major expansion, which added 20 new stores in eight new markets. The Home Depot made huge investment of capital expenditures, inventory and personnel. As a result, The Home Depot’s earnings dropped 42% from $14.1 million to $8.2 million, while revenue increased 62%. Since this expansion is largely financed through debt, the financial leverage increased rapidly from 1984 to 1986. With increased asset base by adding new stores and reduced profitability, The Home Depot’s ROA and ROE both dropped about 50%. The selling, general and administrative costs were about 20% of sales in both 1985 and 1984; however, due to this major expansion plan, selling costs increased by 12%, making Home Depot’s profits not keeping up with its sales.
The Home Depot’s biggest competitor was Hechinger, which had operated hardware stores for a long time and recently entered the do-it-yourself segment of the industry. Unlike The Home Depot’s low cost strategy, Hechinger aimed at upscale stores and high profit margins. While in the same period, Hechinger also experienced a decline in performance, with lower ROA and ROE in 1985. However the decline is less than 2% each year, which is relatively small compared to that of The Home Depot. In addition to having stable performance, Hechinger also had stronger ratios compared to The Home Depot’s, with higher Gross Profit Margins and lower selling costs. However, The Home Depot had a 24% higher Asset Turnover rate, even with the increased asset base in 1986. These differences could be explained by the different strategies of the two companies; while The Home Depot followed a low margin and high volume strategy, Hechinger was trying to reach high profit margin. The two companies’ Sustainable Growth rates were at the same level in 1984 and 1985. After The Home Depot’s aggressive expansion, the growth rate