QUESTION 23 (10 points) Inventory Turns and Inventory Costs We are comparing The

ID: 2607595 • Letter: Q

Question

QUESTION 23 (10 points) Inventory Turns and Inventory Costs

We are comparing The Home Depot, Inc. and Lowe's Companies, Inc., the two giant retailers in home & construction products and services, regarding their inventory turns and inventory costs. (a)[2] You need to find official corporate data for 2016 to fill in the first part of the table below. Specifically, you need to locate annual reports and 10K fillings for 2016 on:

The Home Depot, Inc.: http://corporate.homedepot.com/
Lowe's Companies, Inc.: http://www.lowes.com/ and find "Investor Relations"

Assume that the average annual inventory holding cost rate is 24% for both companies; price and inventory turns are independent; and there are 365 days of operations in a year. Note that: Gross profit = Net sales COGS; and Gross profit margin = Gross profit/Net Sales.

For the following parts, show equations and calculations, and complete the table.

(b)[2] What is the average number of days that a product typically stays in the two companies' inventories until sold (inventory duration)? (2 decimals)

(c)[1] What are the inventory turns a year at these two retailers? (2 decimals)

Home Depot Lowe's Part 1 - Indicators in 2016 End of fiscal year (date) Net sales (millions of $) Cost of goods sold (COGS, millions of $) Gross profit (millions of $) Merchandise Inventory (millions of ) Gross profit margin (GPM, %, 2 decimals) Annual inventory cost rate (%, 2 decimals) Part 2-Inventory Turns Inventory duration (days, 2 decimals) Inventory turns (turns per year, 2 decimals) 24.00% 24.00% Home Depot Lowe's Part 3-Inventory Costs Home Depot Lowe's $90.00 $90.00 A cordless drill (S) Per-unit inventory holding cost rate (%, 2 decimals) Inventory holding cost ($) Inventory holding cost difference (Lowes - HomeDepot, $) Gross profit (S) Immediate gross profit (S)

Explanation / Answer

Part 1- Indicators 2016

Home Depot

Lowe's

End of fiscal year (date)

29-Jan-17

03-Feb-17

Net Sales (millions of $)

94,595

65,017

Cost of Goods Sold (COGS, millions of $)

62,282

42,553

Gross Profit (millions of $)

32,313

22,464

Merchandise Inventory (millions of $)

12,549

10,458

Gross Profit Margin (GPM, %2 decimals)

34.16%

34.55%

Annual Inventory Cost Rate (%, 2 decimals)

24%

Part 2 -Inventory Turns

Inventory Cost ($)

3,011.76

2,509.92

= Merchandise Inventory * Annual Inventoy Cost

Inventory Turns (turns per year, 2 decimals)

20.68

16.95

= Cost of goods sold/Inventory Cost

Inventory Duration (days, 2 decimals)

17.65

21.53

= 365/Inventory Turnover