Home Depot, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended November 3, 2013 (fiscal 2013 third quarter), not 2012 Q3 as indicated in the request metadata. The comparable quarter ended October 28, 2012. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Home Depot operates home-improvement stores and online channels serving do-it-yourself, do-it-for-me, and professional customers. It reported results for the three and nine months ended November 3, 2013. The interim statements are unaudited; KPMG performed a review and reported no material modifications needed for GAAP conformity.
Financial performance and liquidity
| Metric | Third quarter 2013 | Third quarter 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $19.47 billion | $18.13 billion | $61.12 billion | $56.51 billion |
| Gross margin | 34.9% | 34.6% | 34.7% | 34.5% |
| Operating income | $2.29 billion | $1.73 billion | $7.41 billion | $6.02 billion |
| Net earnings | $1.35 billion | $947 million | $4.37 billion | $3.51 billion |
| Diluted EPS | $0.95 | $0.63 | $3.02 | $2.32 |
- Quarterly net sales rose 7.4%; comparable sales increased 7.4%. For the first nine months, net sales rose 8.2% and comparable sales increased 7.6%. Management cited more customer transactions, higher average ticket, appliance strength, maintenance/repair and décor sales, and an improved U.S. housing market.
- Quarterly operating margin was 11.8%, versus 9.6%; nine-month operating margin was 12.1%, versus 10.6%. Margin improvement reflected expense leverage, supply-chain productivity, acquired businesses, and improved shrink, partly offset by product mix.
- Quarterly interest and other expense, net, was $188 million, versus $150 million; nine-month expense was $521 million, versus $385 million. Higher interest expense followed debt issuance. The 2012 nine-month comparison included a $67 million pretax benefit from termination of a guarantee.
- Nine-month cash from operations was $5.98 billion, compared with $5.38 billion. Capital expenditures were $964 million; cash used in investing was $945 million. Cash dividends paid were $1.70 billion and share repurchases were $6.45 billion.
- Cash and equivalents were $4.85 billion at November 3, 2013, versus $2.49 billion at February 3, 2013. Current assets were $18.60 billion and current liabilities $12.53 billion.
- Long-term debt, including current installments, was $16.01 billion at November 3, 2013, compared with $10.80 billion at February 3, 2013. The company issued $2.0 billion of notes in April and $3.25 billion in September; September proceeds were intended in part to repay $1.25 billion of notes due in December 2013 and to fund repurchases.
- Return on invested capital was 19.7%, compared with 16.1% in the prior-year quarter. The company had no borrowings outstanding under its $2.0 billion commercial-paper program or related credit facility and stated that cash, operating cash flow, and financing access should fund planned needs through the next several fiscal years.
Material changes and unusual items
- Prior-year results included a $165 million after-tax charge for closing the remaining seven big-box stores in China ($0.11 per diluted share). Excluding that charge, prior-year diluted EPS was $0.74 for the quarter and $2.43 for the nine months; current-period results had no comparable unusual adjustments.
- Share repurchases totaled $6.4 billion in the first nine months under a $17.0 billion authorization; $10.6 billion remained available at quarter-end. Treasury stock increased, while outstanding shares fell to 1.408 billion from 1.484 billion at fiscal year-end.
- Online sales grew more than 50% and represented 3.3% of quarterly sales, versus 2.2% a year earlier. The company operated 2,260 stores at quarter-end and opened two stores in Mexico during the quarter.
Outlook, commentary, risks, and contingencies
The filing provides no specific numerical earnings or sales guidance. Management’s forward-looking statements address demand, housing and home-improvement markets, competition, credit conditions, inventory, commodity prices, initiatives, capital allocation, and other factors, and caution that actual results may differ materially. Management said there were no material changes to the risk factors in its fiscal 2012 Form 10-K and no material changes in disclosed market-risk exposure.
In November 2013, the company received subpoenas from California authorities seeking records about hazardous-waste disposal at its California facilities. Home Depot said it could not predict the outcome but did not expect a material adverse effect on consolidated financial condition, results, or cash flows. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the filing itself covers fiscal 2013 Q3, ended November 3, 2013.
- Track debt and interest costs after the substantial 2013 note issuances, including repayment of the December 2013 maturity.
- Assess whether comparable-sales growth, margin improvement, and housing-market tailwinds persist.
- Review the pace and funding of share repurchases, dividends, and capital spending, and their effects on leverage and share count.
- Monitor developments in the California hazardous-waste inquiry and any other subsequent disclosures.