Home Depot, Inc. — Form 10-K Summary
Business context and reporting period
Home Depot is a home-improvement retailer operating 2,248 stores in the U.S., Canada, Mexico and China. Although the request identifies “2009 Q4,” this filing reports fiscal 2010, the 52-week year ended January 30, 2011, and includes fourth-quarter results. Fiscal 2009 ended January 31, 2010.
Financial results and liquidity
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net sales | $68.0 billion | $66.2 billion |
| Net earnings | $3.34 billion | $2.66 billion |
| Diluted EPS | $2.01 | $1.57 |
| Gross margin | 34.3% | 33.9% |
| Operating income | $5.84 billion; 8.6% of sales | $4.80 billion; 7.3% of sales |
| Cash from operations | $4.59 billion | $5.13 billion |
| Capital expenditures | $1.10 billion | $966 million |
Fourth-quarter fiscal 2010 sales were $15.13 billion, versus $14.57 billion a year earlier; continuing-operations earnings were $587 million versus $301 million, and diluted continuing-operations EPS was $0.36 versus $0.18. Annual comparable-store sales rose 2.9%, after falling 6.6% in fiscal 2009. Transactions increased 2.4% and average ticket rose 0.5% to $51.93.
At year-end, cash was $545 million, working capital $3.36 billion and the current ratio 1.33. Total debt was $9.75 billion, including $452 million of capital lease obligations; long-term debt-to-equity was 46.1%, up from 44.7%. No commercial paper or backup credit-facility borrowings were outstanding. Operating cash flow declined by about $540 million, primarily due to inventory and other working-capital changes, partly offset by higher earnings. The company returned $2.6 billion through repurchases and paid $1.6 billion in dividends.
Material changes versus prior period
- Sales recovered from the prior year’s decline, and comparable-store sales turned positive. Gross margin expanded 40 basis points, while SG&A fell to 23.3% of sales from 24.0%; operating income increased 21.6%.
- Reported fiscal 2010 results included a $51 million pretax charge from extending the HD Supply loan guarantee. Fiscal 2009 included $146 million of rationalization charges, a $163 million HD Supply investment write-down, and $41 million of after-tax discontinued-operation income. Excluding specified unusual items, diluted continuing-operations EPS was $2.03 in fiscal 2010 versus $1.66 in fiscal 2009.
- The company repurchased 80.9 million shares for $2.6 billion, compared with 7.7 million shares for $213 million in fiscal 2009. Inventory turnover improved to 4.13 from 4.06.
Outlook, risks and unusual items
The filing provides no quantified fiscal 2011 sales or earnings guidance. Management said cash, operating cash flow and capital-market access should fund planned capital expenditures, dividends, repurchases and debt payments for the next several fiscal years. It planned to introduce “buy online, pick up in store” the following year and targeted 60% of store payroll in customer-facing activities by 2013. A 6% quarterly dividend increase to $0.25 per share was announced February 22, 2011.
Key risks include persistent weakness or uncertainty in housing, construction and home-improvement markets; unemployment, credit availability and consumer confidence; intense competition; commodity-price changes; supplier and supply-chain disruptions; execution risks for technology and logistics investments; labor and healthcare costs; cybersecurity and system failures; international and currency risks; and litigation or regulatory developments.
The company guarantees up to $1.0 billion plus unpaid interest on HD Supply’s secured loan, whose reported outstanding balance was $940 million at October 31, 2010. The guarantee was extended to April 1, 2014 and generated the $51 million charge. Other disclosed proceedings included a hazardous-waste inquiry, an appealed dismissal of an ERISA class-action complaint, and an inquiry into alleged VOC-rule violations; management did not expect these matters to materially affect consolidated results. KPMG issued unqualified opinions on the financial statements and internal controls, and management concluded controls were effective.
Most important facts for investors to verify
- Confirm the period distinction: this is fiscal 2010 full-year reporting, with fourth-quarter data included, not a fiscal 2009 Q4 filing.
- Assess whether the sales and margin recovery is durable given continuing housing-market and consumer-demand risks.
- Review cash conversion, inventory growth, debt maturities and the effect of continued buybacks and dividends on liquidity.
- Monitor HD Supply’s ability to service its guaranteed loan and the guarantee’s exposure through 2014.
- Compare future performance with management’s operational targets; this filing supplies no numerical earnings or sales forecast.