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Jeff, I assume you can coordinate a conference call from work. Call me at
home: 415-388-2548. Excellent points and I was thinking along similar lines. Questions I have: How do you know that LT debt gives more advantageous terms? We have no yield curve info nor do we know their credit rating. At what point does their borrowing exceed their covenents? Is our strategy to not raise the required $66million or to stop/slow PPE spending so that the $66m is not needed? ********************************************** Mark D. Guinney, CFA Consultant Watson Wyatt Investment Consulting 345 California Street, Ste. 1400 San Francisco, CA 94104 (415) 733-4487 ph. (415) 733-4190 fax ____________________Reply Separator____________________ Subject: Re: HD Case: Proposed Plan Author: Jeff.Dasovich@enron.com Date: 02/07/2001 11:25 AM Hi folks: Since we have only one page, the write up for number 4 will have to be very brief. Before writing it, though, I wanted to offer a few bullets regarding what angle we might take, and let folks respond, comment, counter, etc. before writing it up. I'll clean and beef up once we've agreed to the approach we'd like to take to question #4. Finally, I can work from my office on this this evening, which means that I can use the conference call capability of my office phone to patch everyone in if we'd like to do a conference call. If that's what folks would like to do, I'd prefer to do the call at around 7 PM. Just let me know. Best, Jeff The question for #4 is: Stock price is down 23%, significant debt has already been tapped to support massive growth and covenants on that debt restrict taking on a lot more debt. What should HD do w.r.t. current operations and future growth strategy? In the near term focus less on growth and more on getting margins and EBIT growth back in line with results from previous years. (Management's Letter to Shareholders alludes to this, but it's difficult to determine whether management is just paying lip service to the need to capitalize on the growth spurt and grown earnings, or continue on the growth effort.) With respect to funding future (more moderate growth), the company does have some room to increase long-term debt (e.g., current ratio for 1986 = 2.26). It seems that HD would get better terms and have increased flexibility by issuing additional debt rather than relying on lines of credit. As such, HD ought to look those sources of funding and fill in any "funding gaps" with funds from the line of credit. Given the significant drop in stock price, HD is likely better off in the near term 1) moderating growth, 2) improving performance to generate cash internally, and 3) using long-term debt issuance to provide the funds needed. Once performance and stock price improves, then HD should consider a stock issuance. How can company improve operating performance? Reduce selling, store operating expenses and pre-opening expenses Improve receivables turnover Improve inventory turnover Improve per store/sales Consider closing poor-performing stores All of which will improve margins Should company change its strategy? If so how? Shift from meteoric growth to moderate, targeted growth, and focus on generating positive cash flow from operations Focus on improving performance at existing stores; specifically focus on controlling costs and asset turnover and productivity Consider another debt issuance rather than rely extensively on credit line in order to decrease cost of funds and increase flexibility
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