Retail and Debt
- Adam Edwards
- Feb 15
- 6 min read
So, I did an article a couple of weeks ago where I did a deep dive into major retailers in the US and pulled apart some of their finances. I thought I'd revisit it, but focus entirely on debt...
Accounting Ratio
Walmart dominates in scale – It has significantly higher assets, liabilities, and equity compared to the other companies.
Home Depot has a high liability proportion – Its liabilities are close to its total assets, indicating heavy leverage.
Costco maintains a strong equity base – Unlike many others, its equity is substantial compared to its liabilities.
Dollar Tree and Dollar General have small equity positions – These discount retailers operate with relatively low equity, suggesting higher reliance on debt.
Kroger's equity is notably small – Its liabilities are significantly larger than its equity, showing high financial leverage.
Lowe’s is also highly leveraged – Its liabilities exceed its assets, which could indicate aggressive debt financing.
Debt Growth
The Kroger Co. has the most dramatic YoY debt increase – It shows a significant surge compared to the other companies.
Costco has negative debt growth – Indicating a reduction in its debt over time. Costco's negative debt growth suggests it is reducing reliance on borrowed funds, which is generally positive. Lower debt means reduced interest expenses, improving profitability and financial flexibility. It also signals strong cash flow and disciplined capital management. However, if debt reduction comes at the expense of growth opportunities or shareholder returns, it could limit expansion. Overall, it’s good for financial stability but may raise concerns if it hinders competitiveness or investment.
Home Depot has consistently high debt growth – Over multiple time frames, demonstrating reliance on borrowing.
Walmart has negative YoY debt growth but positive long-term growth – Suggesting a shift in debt management strategy.
Dollar General and Lowe’s show stable, moderate debt growth – Indicating a balanced approach to debt financing.
Dollar Tree has relatively low debt growth trends – Unlike other discount retailers, it doesn’t appear to be increasing its debt aggressively. Dollar Tree’s low debt growth suggests cautious financial management, which can be positive as it limits interest costs and financial risk. This may indicate strong cash flow and a focus on organic growth rather than debt-fuelled expansion. However, in a competitive retail market, limited borrowing could mean fewer investments in store expansion, technology, or acquisitions. While financially stable, it might risk losing market share if competitors leverage debt to grow aggressively.
Equity vs Debt
Walmart has high equity and high debt – It has strong financial backing but still carries a significant debt load.
Home Depot's debt is much higher than its equity – Suggesting it heavily finances its operations with borrowed funds.
Lowe’s has negative equity – Its total debt far surpasses its equity, making it highly leveraged. Lowe’s negative equity indicates extreme leverage, meaning its liabilities exceed its assets. This is risky, as it suggests reliance on debt financing and potential insolvency concerns. While leverage can boost returns if managed well, it increases vulnerability during downturns. High debt means significant interest costs, reducing financial flexibility. However, if Lowe’s generates strong cash flow and maintains profitability, it can sustain this structure. Still, prolonged negative equity could deter investors and raise credit risks.
Costco maintains a stronger equity position than debt – Suggesting a more conservative financial approach.
Dollar General and Dollar Tree show comparable debt-to-equity levels – Neither has a significantly higher equity base, reflecting their reliance on debt.
Kroger is also debt-heavy relative to equity – Reinforcing the trend that many retail giants depend on leverage. Kroger’s high debt relative to equity suggests a reliance on leverage, which can be beneficial if debt is used efficiently for expansion and operations. However, it also increases financial risk, especially if cash flow weakens or interest rates rise. High debt levels may limit flexibility in downturns and put pressure on profitability due to interest expenses. While common in retail, excessive leverage could impact credit ratings and investor confidence if not managed prudently.
Debt Ratios
Dollar Tree’s Debt/EBITDA is extremely high – This is a red flag, suggesting financial strain or high operational leverage. Dollar Tree’s extremely high Debt/EBITDA ratio is a red flag, indicating financial strain and potential difficulty in servicing debt. A high ratio suggests that earnings before interest, taxes, depreciation, and amortisation (EBITDA) are low relative to debt, raising concerns about liquidity and solvency. If profitability declines, repayment could become challenging. While leverage can drive growth, excessive debt without strong earnings may limit flexibility, increase borrowing costs, and reduce investor confidence in long-term financial stability.
Costco has the lowest debt ratios – Reflecting its strong equity and conservative borrowing approach. Costco’s low debt ratios highlight its strong equity base and conservative financial strategy. This reduces financial risk, lowers interest costs, and enhances stability, making it resilient during economic downturns. A low reliance on debt also means greater flexibility for future investments without heavy borrowing. However, it could indicate a cautious approach that limits aggressive expansion compared to competitors leveraging debt for growth. Overall, it reflects financial strength but may slow high-reward opportunities.
Home Depot and Lowe’s have similar debt ratios – Both companies have a significant debt burden relative to performance.
Walmart’s debt ratios are moderate – Despite its large absolute debt, its ratios indicate reasonable leverage.
Kroger’s Debt/FCF is relatively high – Suggesting that its ability to cover debt using free cash flow is under pressure. Kroger’s high Debt/FCF ratio suggests that its ability to cover debt using free cash flow is strained. This indicates that a significant portion of its cash flow is committed to debt obligations, limiting flexibility for reinvestment, dividends, or operational improvements. If cash flow weakens, debt repayment could become challenging, increasing financial risk. While leverage can support growth, persistently high debt relative to free cash flow may lead to liquidity concerns and higher borrowing costs.
Most companies maintain relatively low Debt/Equity ratios except Dollar Tree – Indicating that aside from Dollar Tree, debt levels are generally within acceptable ranges.
Overall 10 Takeaways
Walmart is the largest but still carries substantial debt, though its equity base is strong.
Home Depot and Lowe’s are heavily leveraged, with liabilities exceeding equity and steady debt growth. Home Depot and Lowe’s rely heavily on debt, with liabilities surpassing equity and consistent debt growth. This boosts expansion but increases financial risk. High leverage raises interest costs and reduces flexibility, making them more vulnerable to economic downturns or rising borrowing costs.
Costco is the most financially conservative – it has lower debt, a high equity base, and negative debt growth. Costco’s financial conservatism, with low debt, a strong equity base, and negative debt growth, enhances its stability and reduces financial risk. This approach minimises interest costs, ensuring consistent profitability and resilience during downturns. It also provides flexibility for future investments without excessive borrowing. However, a cautious strategy may limit aggressive expansion or market opportunities compared to competitors using debt for growth. Overall, it reflects a strong, disciplined financial position with lower risk exposure.
Kroger’s debt is growing at a concerning rate, and its equity is relatively small. Kroger’s rapid debt growth and relatively small equity indicate high financial leverage, increasing risk. Rising debt may strain cash flow and profitability, especially if interest rates climb. Limited equity reduces financial flexibility, making the company vulnerable in downturns. While debt can fuel growth, excessive reliance may impact long-term stability and investor confidence.
Dollar Tree’s debt situation is particularly alarming – its Debt/EBITDA ratio is extraordinarily high.
Debt financing is a common strategy across all these retailers, but some (e.g., Costco) maintain a more balanced approach. Debt financing is widely used among these retailers, supporting growth and operations. However, some, like Costco, take a more balanced approach with lower debt and strong equity. This reduces financial risk, whereas others rely more on leverage, increasing potential returns but also financial vulnerability.
Debt growth trends indicate increasing reliance on borrowing for some firms, while others, like Costco, are reducing debt.
Equity varies significantly, with Walmart and Costco showing the highest, while Lowe’s and Kroger have comparatively weaker equity positions.
Home Depot and Lowe’s are in similar positions, both using significant debt relative to equity and maintaining high liabilities.
Overall, while leverage is prevalent, its sustainability varies – companies like Costco and Walmart seem well-positioned, while Dollar Tree and Kroger exhibit more financial risk.