Home Depot, Inc. — Form 10-Q Summary
Period note: The supplied filing is for the quarter ended July 29, 2018 (fiscal 2018 Q2), not 2017 Q2 as stated in the request metadata. Fiscal 2018 includes 53 weeks. Financial figures below are in U.S. dollars; amounts are in billions unless noted.
Business context and results
Home Depot operated 2,286 stores at quarter-end, including 305 in Canada and Mexico. Second-quarter growth reflected broad-based comparable sales gains and recovery of sales delayed by severe winter weather in Q1. Online sales were 7.5% of net sales and grew 25.7% year over year.
| Metric | Three months ended July 29, 2018 | Year-over-year change | Six months ended July 29, 2018 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $30.463 billion | +8.4% | $55.410 billion | +6.6% |
| Comparable sales | +8.0% | Prior year: +6.3% | +6.2% | Prior year: +6.0% |
| Gross margin | 34.0% | Prior year: 33.7% | 34.3% | Prior year: 33.9% |
| Operating income | $4.901 billion | +9.8% | $8.282 billion | +6.0% |
| Net earnings | $3.506 billion | +31.2% | $5.910 billion | +26.1% |
| Diluted EPS | $3.05 | +35.6% | $5.12 | +30.9% |
Cash flow, balance sheet and capital allocation
- Six-month operating cash flow was $7.907 billion, versus $7.862 billion a year earlier. Capital expenditures were $1.091 billion; operating cash flow less capital expenditures was approximately $6.816 billion.
- Cash and cash equivalents were $3.490 billion at July 29, 2018, including $1.6 billion held by foreign subsidiaries. Current assets were $20.802 billion and current liabilities were $18.426 billion.
- Total debt was approximately $25.498 billion, comprising $2.203 billion of current installments and $23.295 billion of long-term debt. No commercial paper borrowings were outstanding at quarter-end; the company reported compliance with credit-facility covenants.
- Six-month cash uses included $3.121 billion of share repurchases, $2.373 billion of dividends and $1.091 billion of capital expenditures. The company repurchased 14.9 million shares for $3.0 billion through ASRs and open-market transactions. A $15 billion repurchase authorization was in place.
- The quarterly dividend was increased 15.7% in February 2018 to $1.03 per share. Trailing-twelve-month ROIC was 37.9%, compared with 32.0% a year earlier.
Material changes and unusual items
- The effective tax rate fell to 24.7% in Q2 from 36.6% and to 24.2% for the six-month period from 36.0%, primarily due to the Tax Act. Management said the Act contributed $0.47 to Q2 diluted EPS and $0.79 to six-month diluted EPS.
- Adoption of the new revenue-recognition standard increased reported Q2 net sales by $33 million and gross profit by $152 million, with an equal $152 million increase in SG&A; six-month impacts were $66 million, $283 million and $283 million, respectively. Management expected the ongoing effect to be immaterial to financial position, results and cash flows.
- Gross-margin expansion also reflected sales mix and acquisition effects, partly offset by higher transportation and fuel costs. SG&A as a share of sales increased, reflecting the accounting change and business investments, partly offset by sales leverage and expense control.
- Second-quarter comparable average ticket rose 4.9% and comparable transactions rose 2.9%. Lighting was the only department with negative comparable sales, primarily due to LED price deflation.
Outlook, risks and contingencies
- Management expected fiscal 2018 capital expenditures of approximately $2.5 billion and said cash, operating cash flow and financing access should cover operating needs, investment, dividends, repurchases and required debt payments through the next several fiscal years. No specific sales or EPS guidance is provided in the supplied filing text.
- Accounting for certain Tax Act effects remained incomplete, including subsidiary earnings and profits and deemed repatriation details. The company had not yet estimated long-term GILTI effects or selected a related deferred-tax accounting policy; it expected to complete its Tax Act accounting within the permitted one-year measurement period.
- The company was cooperating with an EPA investigation concerning lead-safe work practices for certain installation jobs and had received an EPA civil-enforcement subpoena. A separate California air-quality matter concerning paint thinners and solvents was resolved; the vendor paid the settlement on Home Depot’s behalf. Management said ordinary-course litigation was not expected to have a material adverse effect.
- Management reported no material changes to previously disclosed risk factors or market-risk exposures. Principal cited exposures include interest rates and foreign-currency fluctuations. Forward-looking statements are subject to risks including housing and economic conditions, competition, execution of technology and supply-chain initiatives, vendor relationships, financing access and litigation.
Investor verification points
- Confirm the reporting-period discrepancy: the filing covers fiscal 2018 Q2, despite the request metadata’s 2017 Q2 label.
- Separate underlying operating performance from the Tax Act’s stated EPS benefit and the revenue-standard presentation changes when comparing growth and margins.
- Monitor the completion and potential adjustments of Tax Act accounting, including GILTI and repatriation-related items.
- Track the EPA installation-services investigation, capital spending against the approximately $2.5 billion plan, and the scale and funding of repurchases and dividends.