Financial Accounting and Analysis Course – Annual Report Analysis

1. Introduction

          This paper is designed to comment and marker comparison and contrast on the annual report format of Home Depot and Lowe to their shareholders on various matters including packaging, clarity of the report, availability of hard copy and electronic copy on the website, using the annual report as marketing tool and cover head. This paper will further comment and make comparison  and contrast on the content or body of annual report on matters of messaging, management discussion which may include selected data or other matters that may fall under the category of ‘reporting to shareholders’.

2. Analysis and Discussion

2.1  Comment on Format

2.1.1        Packaging

       This paper defines packaging defines how the annual report is being presented as to accomplish attraction of use from users from an artistic point of view. Attraction as a value may include desirability to use the report because it is serving a unique purpose and that the report is communicating how to use it, how to benefit from it. The meaning of packaging could be further extended to accomplish the exclusivity of the content of the information for intended users or complying with the requirements of law why such is being made.

       In the case of Home Depot (2008), a reader’s attention must be caught by the picture of two employees of the company wearing their aprons and walking down in inside the company’s stores with the printed message “Our Aprons, Your Store”. The first impression that one may get would be the sheer meaning that in the company, what is more important is service and willingness to assist the customer no matter what it takes.

          It appears to be primarily intended more to it customers as the most important stakeholders. The first page is followed by the table of contents for the second page which contained the arrangement of the following information, Performance Summary, Letter to Shareholders, Our Associates, Your Store, our communities, Form 10-K and then Board of Directors and Senior Leadership Team.

     This second message appears to create a balance after the first page by putting first the message of who should get the priority to receive the information contained.  This time the shareholders are addressed first, then by employees which are termed as “associates” and then the customers, and then the members of communities and lastly to the Board of Directors and Senior Leadership Team.   Above this categorization of stakeholders is the performance summary which contained the how has the company delivered in 2007 compared the previous year.   It is notable the associates are given more importance than the customers is based on the arrangement of table of contents.  As to whether this is true will be found latter in connection with other part of the report.

        The 2007 Annual Report of Lowe’s (2008) in comparison contained its first page with the picture of a woman opening the door of house and with the message of “opportunity behind every door.”  From the point of view of an ordinary reader of the annual report, the picture in the first page is conveying the message that company has surprises to offer to its shareholders. Although the message could be interpreted to be addressed to every stakeholder of the company, it would be more consistent to think that it was addressed more primarily to is stockholders since an annual report is usually given during every annual stockholders’ meeting for distribution to stockholders.

        The second page of Lowe’s annual report contained the Financial Highlights on the right side of the page and the business description on the last page. This is in contrast to that of Home Depot where second page is the table of contents. The financial highlights basically include the information on sales, gross margin, pre-tax earnings, dividends per share and a graph on how the dividends for the last years have been increasing. On the left hand, ‘Description’ side would inform about what the company does and its short story and the fact that its stock is listed in the stock exchange.

        Based on two pages, on what could attract the readers more in terms of packaging, this researcher at this point believes that it would be that of Lowe’s because of its direct communication of the needed message without having to come out as hypocritical by appearing to send the message to other stakeholders first before the real recipients at the time of the stockholders’ meeting.

2.1.2        Clarity of the report

      This paper defines clarity of the report as referring to communication information that is needed in the most intelligible and understandable way. Based on the first two pages so far analyzed in the first section, it can be argued that each of annual report can claim to have clarity because in annual report it is basic to inform the stockholders what is happening to the company.  This appears to have been accomplished because the basic information of profitability, liquidity and solvency are there as manifested by the incorporation of the financial statements in the annual report.

      Although in the case of Home Depot, the table of contents in second page has made the announcement that performance summary is first in the list and that means that what the stockholders want to see is forthcoming in the following page.

      True indeed, the table of contents in the first page fulfilled its claim in putting into the Performance Summary in the third page the required information of net sales, net earnings, earnings per share, total assets, total liabilities, stockholders’ equity and store count for the years 2005 through 2007.  But again the information is preceded by a big picture of customers in the company doing something in one of the company’s busy store.

      As to what is the intention of the big picture almost overshadowing the financial information to communicate the level of performance attained is not clear for this researcher except again the implication that company is giving great attention to the need of its customers.

      In the case of Lowe’s, it may be asserted that it has partly attained its clarity in the second page but the information presented appears to be less complete than what was presented by Home Depot in the Performance Summary page.

2.1.3        Availability of hard copy and electronic copy on the website

         Since both companies have their electronic copies as evidenced in their websites and basis of analysis of this paper, it would be easier to believe that hard copies for each company may also be available because the electronic copies could easily be printed by company for distribution to stockholders during stockholder’s meeting.

2.1.4        Using the annual report as marketing tool

        The issue of making use as marketing tool is more obvious for Home Depot as evidenced by the big picture in the first three pages showing busy employees and customers in the store.  As stated earlier, since the pictures are appearing in the annual report while the report is primarily intended for stockholders, it would appear the company is promoting the company to the stockholders by treating them as customers at the same time and that the annual report pictures can only be evidence of being ready to deliver service to customer with employees wearing their usual aprons in the store.

         Wearing an apron indicates readiness to be exposed to dirt and the employees are ready to do it if the customers need to have some service that would involve the employees help. In an ordinary store, it is typical to see sales ladies but in Home Depot, men are wearing aprons which carry more the message that there is a massive movement of goods in store in that its male employees must wear apron to help serve the customers.

       In the case of Lowe’s the annual report may be said to be used also as marketing tool since beginning at page 6 and in page 7, the company is now showing pictures of its products without employees in them.  This means that its showcase of products is there to see and could speak for their quality without need to so much sales talk to close the deal. It does not mean however that employees cannot be consulted about its products because in the other parts of the annual report, it could be shown the employees are interacting also with its customers in its stores.

2.1.5        Cover head

        This paper is defining cover head as that appearing on cover page which was referred here in the annual report as first page earlier. This part, in order not to be repetitive must be deemed to have made the comparison as it was already explained earlier. But to put a simple summary of those first pages, in Home Depot, two employees wearing aprons are delivering the message of their readiness to help customers but in the case of Lowe’s the message of opportunity being ready to be discovered in every door to be opened is addressed to shareholders with woman the opening the door of a house expecting something good to happen.

2.2  Comment on Contents

      This part will attempt to explain or address who are the people comprising the companies in their claims, what do they value and what they are doing for their stakeholders may include the shareholders, customers, the employees and the others.

      In the case of Home Depot the company is conveying the message its giving great importance to its employees who are called associates.   Home Depot has done it in the table of contents by communicating first the information to its associates before to its customers. The company has declared its emphasis on the importance of its having to take care its associates who will be the one to take care of its customers.  One must understand at this point therefore that the company’s communicating first to the associates do not mean a neglect or secondary treatment of its customers. It is actually an act of expansion of who will take care of the customer.  The company is acknowledging that its business is people-based and people-oriented that its investment in people cannot be understated.

          The company has declared in its 2007 annual report that it is taking care of its employees as doing it will strengthen its market leadership position. Thus the company has taken significant steps to improve their compensation and recognition of these associates as the expert to build the companies stores. The company’s declaration for its employees include stock bonus program for its assistant store managers under a restricted category. The company wants its assistant store managers to feel the feeling of real owners and making them as stockholders which must be very consistent with the plan to have their best support in protecting the interest by actually working not as employees alone but part owners.

           Being an owner has with it the meaning of giving an extra kind of care for something that you own. It is said that an owner carries the risk of having to lose what one owns so that the attitude for the thing owned would be somewhat of eternal vigilance if the same would have to be preserved.

      The company’s strength as market leader in the industry appears to have its basis from the way the company is treating its employees well. The company declares to have hired licensed specialists that can provide knowledgeable service to its customer and is giving good training for these associates. It was therefore proud to announce that its full time voluntary attrition was almost twenty percent down in 2007.  This again means that the company’s great concern for employees extend to protecting the employment of its personnel and if ever there is reduction of employees, the initiative will come from employees after rendering quite a time a service for the company.

       The attitude of Lowe’s as to which has to be addressed first with the company is seen in the manner the report is addressed to shareholders. It first addressed to shareholders via a formal letter.  The company is not putting its employees in the same level as stockholders are practiced by Home Depot based on early part of the report to shareholders. The same is confirmed by the company’s not offering a bonus stock program as that of Home Depot.

      While the company declares that it has more than more than 200,000 customer-focused employees, the ordinary reader of the annual report will asked how these employees would become customer-focused.   Are they customer –focused because they are just paid their employees’ salaries? Or, are they customer-focused because they are working also as owners?  This appears to be a great advantage of Home Depot over that of Lowe’s and this should explain the difference why Home Depot is performing better financially in terms of higher revenues, higher capitalization, higher earning per share, and higher number of employees (Yahoo Finance,2008) based on the latest twelve-month period.

      Lowe’s however admits to provide competitive compensation packages and great career opportunities that could keep these employees to stay with the company for a longer period.  The company is emphasizing customer service where it claims also provision of knowledgeable service from employees as source of its competitive advantage.  The company like Home also claims giving training to employees in the serving best the needs of its customer. Customer service at Lowe’s extends to ideas on design, selection of product and ensuring completion of selected projects with success.

       In the desire of Lowe’s annual report to please its stockholder, its presentation starts with how has the company has met or failed to meet its corporate target in terms of revenues, profits and earnings per share.  This is the reason why in the second page the financial-highlights portion is revealing the due importance of such information.  Thus the report was more concerned on how the external environment is affecting the business and how the company is going to management the long-term growth of the company as well its expense management program in ensuring targeted levels of profitability.

3.  Conclusion

        This paper has made comments, comparisons and contrasts on the annual report formats of Home Depot and Lowe to their shareholders on various matters such as packaging, clarity of the report, availability of hard copy and electronic copy on the website, using the annual report as marketing tool and cover head and this paper has note certain similarities and distinctions.  Their formats basically dwell on their attitude on which is more important in the categorization of stakeholders. In the case of Home Depot, what appears most important are the customers based on the first few pages which indicate pictures of employees in aprons who are ready to serve its customers.  But this was latter interpreted to being used as marketing tool since stockholders are main addressees of an annual report.

      Lowe’s on the hand gives more importance to shareholders by the mere message of the cover page  about every opportunity available for the company and which was followed by financial highlight without first making a showing of table of contents.   In terms of clarity, Lowe’s may have the edge because of its direct address of stockholder’s concerns. As a marketing tool, Home Depot is submitted to be better as it carries the message of readiness to serve customers.

      Their contents when compared revealed more what were found in the images or formats. The strategy of presenting employees picture by Home Depot has its reason of giving incentives to assistant managers to feel and act as real owners by its stock bonus program. Lowe’s while declaring customer –focused employees managed to admit giving competitive compensation which is helping the company to attract and keep its employees. In terms of revenues, number of employees and earnings per share,  Home Depot is doing better than Lowe’s and the said information may be confirmatory of what the their annual reports are trying to convey when viewed from a format-and-manner of reporting perspectives.

        Based on the foregoing, it could be further concluded that annual reports may served different purposes other than informing the stockholders about what is happening in a company. It could be a powerful marketing tool to promote the company while accomplishing its main purpose. As found in this paper, Home Depot attitude of using it as tool is supported by its financial performance.   A strategic oriented company must take advantage of the same since it could reduce advertising cost while promoting sales revenues and the values of the company in how it is running its business.

References:

Home Depot (2008) 2007 Annual Report {www documents} URL, http://www.homedepot.com/, Accessed October 26, 2008

Lowe’s (2008), 2007 Annual Report {www documents} URL,  http://www.lowes.com/, Accessed October 26, 2008

Yahoo Finance, Competitors Comparative Date for the latest 12 months, {www documents} URL, http://finance.yahoo.com/q/co?s=HD, Accessed October 26, 2008