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Investors' Roundtable / Rule Maker Companies


Subject:  Re: Poll: next $500, where to? Date:  3/1/2000  1:36 PM
Author:  TMFTribe Number:  5680 of 8329

Although the vote limited us to the 5 rulemakers listed. I would strongly consider Home Depot in my selection. Does it qualify under the rulemaker guidelines?

In a strict sense, no it doesn't. It fails mostly because its gross and net margins don't meet the 50% and 7% thresholds. yFool completed a Rule Maker analysis on Home Depot a few weeks back, which you can view at the following link:

This really isn't that surprising, since most mass retailers encounter the same problem. In order to make money, Home Depot must sell huge volumes of "stuff" since their profit margin per item is fairly low. This approach has served them and others like Wal-Mart well, but it is decidely non-Rule Makerish.

Rule Maker's have to ability to maintain higher margins simply because they have the power of brand -- people are willing to pay more for their product. For example, generic soda costs about 50% of what Coke products go for, yet the vast majority of the consumer public buys name brands. Why? They like the product, and the cost difference between the two is relatively insignificant. With retailers, they have a much harder time creating that "branding" effect since their isn't much that differentiates them from their competition. Since they are all pretty much the same, in order to attract additional customers, they must lower their prices, which hurts their margins.

Hope this helps.

the LanceMan

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