Business context and reporting period
Period discrepancy: Although the request identifies “2018 Q3,” the supplied filing is Home Depot’s Form 10-Q for fiscal 2019’s third quarter, ended November 3, 2019. Comparisons are with the quarter ended October 28, 2018. The filing reports unaudited interim results; the independent accountant performed a review, not an audit.
Home Depot reported 2,290 stores at quarter-end. The company operates in the U.S., Canada, and Mexico; 13.4% of stores were in Canada and Mexico.
Financial performance and liquidity
| Metric | Third quarter | First nine months |
|---|---|---|
| Net sales | $27.223 billion, up 3.5% | $84.443 billion, up 3.3% |
| Comparable sales | Up 3.6% | Up 3.0% |
| Gross profit / margin | $9.387 billion / 34.5% | $28.836 billion / 34.1% |
| Operating income / margin | $3.947 billion / 14.5% | $12.440 billion / 14.7% |
| Net earnings | $2.769 billion | $8.761 billion |
| Diluted EPS | $2.53 | $7.96 |
| Cash from operations | Not separately reported for the quarter | $10.664 billion |
Quarterly comparable transactions and average ticket each rose 1.8%. Online sales were 8.9% of net sales and grew 21.9% in the quarter. For the nine months, online sales grew 21.6%.
At November 3, 2019, cash and cash equivalents were $2.193 billion. Short-term debt was $695 million; current and long-term debt totaled $28.415 billion, excluding lease liabilities. Operating and finance lease liabilities totaled $7.045 billion. Total stockholders’ equity was negative $1.082 billion, reflecting the company’s capital structure and treasury stock.
Nine-month cash flows included $1.891 billion of capital expenditures, $4.477 billion of dividends, and $3.909 billion of cash share repurchases. Cash increased by $306 million from the fiscal-year opening balance. Trailing-12-month ROIC was 45.1%, versus 42.2% a year earlier.
Changes versus the comparable period
- Third-quarter net sales increased 3.5%, but net earnings declined from $2.867 billion to $2.769 billion. Diluted EPS rose from $2.51 to $2.53, supported in part by fewer weighted-average shares.
- Quarterly gross margin decreased from 34.8% to 34.5%; operating margin fell from 14.7% to 14.5%. Management attributed the gross-margin decline primarily to higher shrink and product mix.
- Quarterly interest and other, net increased to $280 million from $224 million, primarily reflecting higher interest expense from higher debt balances. The effective tax rate rose to 24.5% from 21.4%, partly because the prior-year period included nonrecurring Tax Act benefits and a settlement of uncertain tax positions.
- For the first nine months, sales rose 3.3% while net earnings were slightly lower, at $8.761 billion versus $8.777 billion; diluted EPS rose 4.3% to $7.96.
- Operating cash flow increased by $628 million to $10.664 billion year over year. Capital expenditures rose to $1.891 billion from $1.711 billion, while cash dividends increased to $4.477 billion from $3.548 billion and share repurchases decreased to $3.909 billion from $5.518 billion.
Outlook, commentary, risks, and unusual items
Management expected fiscal 2019 capital expenditures of approximately $2.7 billion. It stated that cash, operating cash flow, access to debt markets, and commercial-paper facilities should be sufficient to fund operations, investment, dividends, repurchases, and debt payments through the next several fiscal years. The filing provides no clear full-year sales or EPS guidance.
Management cited growth across core categories and investments in the interconnected retail experience as sales drivers. Lumber comparables were pressured by commodity price deflation; Electrical/Lighting was affected by light-bulb replacement cycles and price deflation. A stronger U.S. dollar reduced sales growth by $41 million in the quarter and $146 million for the first nine months.
Home Depot adopted the new lease accounting standard in February 2019, recognizing $5.7 billion of operating lease right-of-use assets and $6.0 billion of operating lease liabilities at adoption. The company said adoption did not materially affect earnings or cash flows. Approximately $1.6 billion of undiscounted leases had not yet commenced. In June 2019, it issued $1.4 billion of senior notes; net proceeds were used to repay maturing notes and for general corporate purposes, including share repurchases.
The company reported no material changes to the risk factors in its 2018 Form 10-K. It said ordinary-course litigation was not expected to have a material adverse effect and reported compliance with credit-facility covenants. Market exposures include interest rates, foreign exchange, and commodity price movements.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers fiscal 2019 Q3, not 2018 Q3.
- Assess whether comparable-sales growth can continue and whether shrink, product mix, lumber deflation, and other pricing factors will keep pressuring margins.
- Review the balance-sheet and cash-flow implications of debt, lease obligations, capital spending, dividends, and ongoing share repurchases.
- Monitor the effects of higher interest expense and the higher effective tax rate on earnings and EPS.
- Compare subsequent filings with management’s $2.7 billion fiscal 2019 capital expenditure expectation and liquidity assessment.