Home Depot, Inc. — Form 10-Q Summary
Period discrepancy: The request metadata says 2009 Q2, but the supplied filing is for the quarter ended August 1, 2010 (fiscal 2010 second quarter), with six-month comparisons through that date. The filing’s comparable prior-year quarter ended August 2, 2009.
Business context and reporting period
Home Depot operates warehouse-style home improvement stores serving do-it-yourself, do-it-for-me, and professional customers. The filing reports unaudited results for the three and six months ended August 1, 2010. The independent accountant performed an interim review, not an audit.
Financial performance
| Metric | Q2 FY2010 | Q2 FY2009 | Six months FY2010 | Six months FY2009 |
|---|---|---|---|---|
| Net sales | $19.410B | $19.071B | $36.273B | $35.246B |
| Gross profit | $6.582B | $6.388B | $12.376B | $11.838B |
| Gross margin | 33.9% | 33.5% | 34.1% | 33.6% |
| Operating income | $2.049B | $1.833B | $3.354B | $2.813B |
| Net earnings | $1.192B | $1.116B | $1.917B | $1.630B |
| Diluted EPS | $0.72 | $0.66 | $1.14 | $0.96 |
- Q2 sales rose 1.8% and six-month sales rose 2.9% year over year. Comparable-store sales increased 1.7% in Q2 and 3.2% for the six months, versus declines of 8.5% and 9.3% in the respective prior-year periods.
- Q2 operating margin was 10.6%, compared with 9.6%; net margin was 6.1%, compared with 5.9%. Six-month operating margin was 9.2%, compared with 8.0%; net margin was 5.3%, compared with 4.6%.
- Six-month operating cash flow was $3.363B, versus $3.328B. Capital expenditures were $407M; cash dividends paid were $793M; and share repurchases used $1.209B.
- At August 1, cash and equivalents were $2.395B. Current assets were $15.757B and current liabilities $12.739B. Current debt installments were $2.022B and long-term debt excluding current installments was $7.727B.
- Dividends declared were $0.23625 per share in Q2, up from $0.225. Long-term debt-to-equity was reported at 39.7%, versus 50.4% at the end of Q2 FY2009.
Material changes and management commentary
- Margin improvement reflected higher vendor-volume rebates, fewer markdowns and promotions, improved seasonal assortment management, and better shrink performance. SG&A as a share of sales declined, supported by sales leverage and lower payroll and incentive costs, partly offset by higher credit costs.
- Management said Q2 sales reflected some demand pulled forward into Q1 by more favorable weather, as well as softer economic conditions in Q2. Lumber and copper price inflation contributed about 100 basis points to comparable-store sales.
- Management attributed improved service ratings to its Customers FIRST training and reported improved year-over-year inventory turnover, 4.4 times versus 4.3 times. Sixteen Rapid Deployment Centers served over 80% of U.S. stores; the company was on track to serve all U.S. stores by fiscal year-end.
- Adjusted for the $51M pretax HD Supply guarantee-extension charge, six-month FY2010 diluted EPS was $1.16. The company reported adjusted EPS of $1.01 for the six months of FY2009 after excluding rationalization charges and other specified adjustments.
Outlook, risks, and unusual items
- No specific numerical sales or earnings guidance is provided in the supplied filing text. Management said cash, operating cash flow, and capital-market access should fund capital expenditures, dividends, share repurchases, and scheduled debt payments through the next several fiscal years.
- After quarter-end, Home Depot repaid $1.0B of 4.625% senior notes due August 15, 2010 and planned to refinance the debt in Q3 FY2010. A replacement $2.0B commercial-paper program and related credit facility had no outstanding borrowings at quarter-end; the facility expires in July 2013. The company reported covenant compliance.
- A March 2010 amendment extended Home Depot’s guarantee of an HD Supply $1.0B loan to April 1, 2014. The extension generated a $51M pretax charge in the first quarter and first six months of FY2010.
- Key cited risks include weak housing and home-improvement markets, constrained mortgage, consumer, and commercial credit, reduced consumer spending and confidence, delinquencies, and supplier disruptions. Management noted continuing exposure to interest-rate market risk.
- In an ERISA-related case, the district court dismissed plaintiffs’ amended complaint with prejudice; plaintiffs appealed. Home Depot said it could not predict the outcome but did not expect a material effect on financial condition or results.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied document covers Q2 FY2010, not Q2 FY2009.
- Review the drivers and durability of comparable-store sales growth, including weather-related timing and commodity-price inflation.
- Assess the HD Supply guarantee exposure and the planned refinancing of the repaid $1.0B notes.
- Reconcile reported and adjusted earnings, including the guarantee charge, prior-year rationalization charges, and the prior-year foreign tax benefit.
- Review the full annual-report risk factors and the status of the ERISA appeal; the filing provides no quantified forward earnings guidance.