Business Context and Reporting Period
The filing is Home Depot, Inc.’s Form 10-Q for the quarter ended October 30, 2011, covering the third quarter and first nine months of fiscal 2011. The filing compares results with the periods ended October 31, 2010. This differs from the request metadata’s “2010 Q3.” Home Depot operates warehouse-style home-improvement stores serving do-it-yourself, do-it-for-me, and professional customers.
Financial Performance
| Metric | Third quarter 2011 | Third quarter 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $17.326 billion | $16.598 billion | $54.381 billion | $52.871 billion |
| Gross profit | $5.961 billion | $5.685 billion | $18.665 billion | $18.061 billion |
| Operating income | $1.615 billion | $1.448 billion | $5.331 billion | $4.802 billion |
| Net earnings | $934 million | $834 million | $3.109 billion | $2.751 billion |
| Diluted EPS | $0.60 | $0.51 | $1.97 | $1.65 |
Third-quarter sales rose 4.4%, net earnings 12.0%, and diluted EPS 17.6%. Nine-month sales rose 2.9%, net earnings 13.0%, and diluted EPS 19.4%. Gross margin was 34.4% versus 34.3% in the quarter and 34.3% versus 34.2% year to date; operating margin was 9.3% versus 8.7% and 9.8% versus 9.1%, respectively. Net margin was 5.4% versus 5.0% and 5.7% versus 5.2%.
Comparable-store sales increased 4.2% in the quarter (U.S. stores: 3.8%) and 2.7% for the first nine months. Management attributed the quarter’s strength partly to Hurricane Irene and early winter weather, as well as core-department performance; average ticket increased 3.0% in the quarter.
Operating cash flow for the first nine months was $5.691 billion, up from $3.986 billion. Capital expenditures were $820 million; investing cash outflow was $683 million. Financing cash outflow was $3.297 billion, including $3.056 billion of share repurchases and $1.187 billion of cash dividends. Cash ended the period at $2.234 billion, compared with $545 million at January 30, 2011.
At October 30, 2011, total current assets were $15.478 billion and current liabilities $10.586 billion. Long-term debt was $10.739 billion, plus $44 million of current installments; total liabilities were $23.730 billion. Management reported a third-quarter long-term debt-to-equity ratio of 60.4%, versus 45.8% in the prior-year quarter. No commercial-paper or related credit-facility borrowings were outstanding; the programs and back-up facility provide up to $2.0 billion. The filing says cash, operating cash flow, and financing access should cover planned capital spending, dividends, repurchases, and debt payments for the next several fiscal years.
Material Changes and Management Commentary
- Gross-margin improvement was attributed to U.S. supply-chain transformation, partly offset by sales mix and higher shrink. Lower SG&A as a share of sales reflected expense leverage, partly offset by natural-disaster expenses.
- Operating income rose 11.5% in the quarter and 11.0% year to date. Depreciation and amortization declined, partly reflecting more fully depreciated assets.
- Management reported a 14.1% return on invested capital for the quarter, compared with 12.0% a year earlier. Share repurchases contributed $0.03 and $0.10 to diluted EPS for the quarter and nine months, respectively.
- The company issued $2.0 billion of senior notes in March 2011, with maturities in 2021 and 2041. Proceeds funded a $1.0 billion accelerated share repurchase and repayment of $1.0 billion of notes that matured.
- Management highlighted customer-service, product-assortment, productivity, and interconnected-retail initiatives. Buy Online, Pick-up in Store rollout was completed in the quarter; an online-platform upgrade was expected by fiscal year-end. Mechanization of 18 of 19 rapid deployment centers was expected by the end of fiscal 2012.
- The company announced a 16% increase in its quarterly dividend to $0.29 per share on November 15, 2011. It operated 2,246 stores at quarter-end, including one temporarily closed because of flooding.
Outlook, Risks, and Unusual Items
The filing provides no specific numerical earnings or sales guidance. Management’s liquidity outlook is described above. Forward-looking statements identify uncertainty around demand, the economy and housing markets, credit conditions, commodity prices, execution of operating initiatives, capital allocation, and access to debt markets. The company reported no material changes to the risk factors in its fiscal 2010 Form 10-K.
A $32 million impairment charge was recorded in the second quarter for a non-core carpet-cleaning and cabinet-refinishing business, which was sold in the third quarter; sale proceeds were $101 million net. The company also guaranteed up to $1.0 billion plus unpaid interest on an HD Supply loan; the reported outstanding loan balance was $933 million as of July 31, 2011, and the guarantee expires April 1, 2014. Management stated that senior-note covenants were not expected to affect liquidity or capital resources. The interim financial statements were reviewed by KPMG, not audited; the review identified no material modifications needed for GAAP conformity.
Important Facts for Investors to Verify
- Confirm the intended period: the supplied filing is for fiscal Q3 2011, not Q3 2010.
- Assess whether comparable-sales growth, including storm-related demand, is sustainable and how housing-market conditions may affect results.
- Track debt growth, interest expense, share repurchases, and the company’s stated liquidity capacity.
- Monitor the HD Supply guarantee, including the borrower’s repayment capacity and the guarantee’s remaining exposure.
- Review the effects of the sold non-core business and execution of the supply-chain, online, and store-productivity initiatives.