Home Depot, Inc. — Form 10-Q Summary
Period: The filing covers the second quarter and first six months of fiscal 2019, ended August 4, 2019, with comparisons to periods ended July 29, 2018. The request metadata says “2018 Q2,” but the filing itself is for 2019 Q2. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Quarter ended August 4, 2019 | Six months ended August 4, 2019 |
|---|---|---|
| Net sales | $30.839 billion, up 1.2% | $57.220 billion, up 3.3% |
| Comparable sales | Up 3.0% | Up 2.8% |
| Gross margin | 33.8%, versus 34.0% | 34.0%, versus 34.3% |
| Operating income | $4.896 billion, versus $4.901 billion | $8.493 billion, versus $8.282 billion |
| Net earnings | $3.479 billion, versus $3.506 billion | $5.992 billion, versus $5.910 billion |
| Diluted EPS | $3.17, up 3.9% | $5.43, up 6.1% |
| Operating cash flow | Not separately reported | $8.497 billion, versus $7.907 billion |
Quarterly sales growth reflected higher comparable average ticket and transactions. Online sales were 8.9% of sales and grew 20.1% in the quarter; for the six-month period, online sales grew 21.4%. The stronger U.S. dollar reduced sales growth by $29 million in the quarter and $105 million year to date. Gross margin pressure stemmed mainly from higher shrink, product mix, and supply-chain expense. Higher debt balances contributed to increased interest expense.
Cash flow, balance sheet, and capital allocation
- Six-month investing cash outflow was $1.249 billion, including $1.246 billion of capital expenditures. Management expected fiscal 2019 capital expenditures of approximately $2.7 billion.
- Six-month financing cash outflow was $6.488 billion: $2.991 billion in dividends, $2.619 billion in share repurchases, and net repayments of short- and long-term debt, partly offset by $1.404 billion of long-term debt proceeds.
- Cash and cash equivalents were $2.547 billion at August 4, 2019, including $1.9 billion held by foreign subsidiaries. No commercial paper borrowings were outstanding at period end; the company had a $3.0 billion commercial paper program backed by $3.0 billion in credit facilities.
- Total debt on the balance sheet was approximately $28.379 billion, including current and long-term debt. The company issued $1.0 billion of 2.95% senior notes due 2029 and $400 million of 3.90% senior notes due 2047 in June 2019, using proceeds in part to repay notes that matured that month.
- Adoption of the new lease standard in February 2019 brought operating lease right-of-use assets and liabilities onto the balance sheet. At August 4, operating lease liabilities totaled $6.094 billion; finance lease liabilities totaled $1.087 billion. The company reported $52.010 billion in assets and $53.170 billion in liabilities, resulting in a $1.160 billion stockholders’ deficit.
- The quarterly dividend was increased 32% in February 2019 to $1.36 per share. The company reported trailing-twelve-month ROIC of 43.7%, versus 37.9% a year earlier.
Changes, outlook, and risks
- Compared with the prior-year quarter, sales and diluted EPS increased, but net earnings edged down and gross margin narrowed. For the first six months, sales, net earnings, and diluted EPS increased, while gross margin declined 0.3 percentage points.
- Fiscal 2018 included 53 weeks, compared with 52 weeks in fiscal 2019; the filing says the calendar shift affected the difference between comparable-sales growth and total-sales growth.
- Management said it expects lumber prices to remain depressed in the second half of fiscal 2019. It expressed confidence that cash on hand, operating cash flow, debt-market access, and available financing would support operations, investment, dividends, repurchases, and debt payments through the next several fiscal years. No full-year sales or earnings guidance is stated in the supplied filing text.
- All departments except Lumber had positive comparable sales in the quarter. Lumber was affected by commodity price deflation; Flooring and Electrical/Lighting were slightly negative for the six-month period, partly due to prior-year hurricane-related sales and light-bulb price deflation.
- The company disclosed an ongoing EPA investigation concerning lead-safe work practices for certain installation jobs. It received a grand jury subpoena from the U.S. Attorney for the Northern District of Georgia and an amended EPA civil subpoena during the quarter, and said it was cooperating. A separate California air-quality matter was resolved, with the vendor paying a settlement on the company’s behalf. Management said ordinary-course litigation was not expected to have a material adverse effect.
- Management reported no material changes to the risk factors in its 2018 Form 10-K and no material changes in market-risk exposure. It identified interest-rate and foreign-currency fluctuations among relevant exposures. The interim financial statements were reviewed by KPMG, not audited.
Important facts for investors to verify
- Confirm the intended reporting period: this source is fiscal 2019 Q2, not 2018 Q2.
- Assess whether margin compression, shrink, supply-chain costs, lumber deflation, and the impact of the extra prior-year fiscal week persist.
- Review debt maturities, interest expense, lease obligations, and the company’s capacity to sustain dividends and repurchases alongside planned capital spending.
- Monitor developments in the EPA investigation and any resulting financial, operational, or reputational exposure; the filing provides no clear estimate of potential losses.
- Consider that the balance-sheet comparison is affected by adoption of lease accounting, and that the company had a stockholders’ deficit at quarter end.