Home Depot, Inc. — Form 10-Q Summary
Reporting period: The filing covers the fiscal quarter ended November 1, 2009, and the first nine months of fiscal 2009, compared with the periods ended November 2, 2008. This differs from the request metadata’s “2008 Q3.” Financial statement amounts below are in millions of dollars, except per-share data.
Business context and performance
Home Depot operates warehouse-style home improvement stores serving do-it-yourself and professional customers. At quarter-end it had 2,242 stores. Management attributed weak sales to the global downturn, continued weakness in U.S. housing and home improvement markets, and pressured consumer spending.
| Metric | Q3 FY2009 | Q3 FY2008 | First 9 months FY2009 | First 9 months FY2008 |
|---|---|---|---|---|
| Net sales | $16,361 | $17,784 | $51,607 | $56,681 |
| Gross profit | $5,561 | $5,994 | $17,399 | $19,030 |
| Operating income | $1,263 | $1,323 | $4,076 | $4,093 |
| Net earnings | $689 | $756 | $2,319 | $2,314 |
| Diluted EPS | $0.41 | $0.45 | $1.37 | $1.37 |
| Gross margin | 34.0% | 33.7% | 33.7% | 33.6% |
| Operating margin | 7.7% | 7.4% | 7.9% | 7.2% |
Cash flow, debt and liquidity
- First-nine-month operating cash flow was $4,664, versus $4,794 in the prior-year period. Investing activities used $385, including $568 of capital expenditures; financing activities used $2,099.
- Cash and cash equivalents were $2,719 at November 1, 2009, up from $519 at February 1, 2009. Cash and short-term investments totaled $2.7 billion.
- Current and long-term debt totaled $10,425 at quarter-end, versus $11,434 at fiscal year-end. The company repaid $1,015 of long-term debt during the first nine months. Management reported a 44.7% long-term debt-to-equity ratio, compared with 56.3% at the end of Q3 FY2008.
- No commercial paper or related credit-facility borrowings were outstanding. The company said cash, operating cash flow and access to debt markets should fund capital expenditures, dividends and required debt payments for the next several fiscal years. It intended to use cash to repay $750 million of senior notes due in December 2009.
- Dividends paid were $1,144; capital expenditures were substantially lower than in the prior-year period, which helped reduce investing cash outflow.
Material changes and management commentary
- Sales declined 8.0% in Q3 and 9.0% year to date. Comparable-store sales fell 6.9% in Q3 and 8.5% year to date; U.S. comparable-store sales fell 7.1% in Q3. Management cited lower average tickets, weak markets and fewer stores open. Currency movements reduced first-nine-month sales by approximately $750 million.
- Q3 net earnings fell 8.9% year over year, while year-to-date net earnings were slightly higher. Year-to-date operating income was approximately flat despite the sales decline. Gross margin improved, which management attributed to vendor rebates, product mix, lower markdowns and improved shrink performance; expense controls and lower private-label credit-card costs also helped.
- Management reported year-to-date diluted EPS of $1.42 excluding rationalization charges, versus $1.58 in the prior-year period on the same basis. A favorable foreign tax settlement reduced tax expense by approximately $50 million and increased year-to-date EPS by about $0.03.
- Inventory at quarter-end was $1.1 billion below the prior-year quarter; average inventory per store declined 7.8%. The company continued its supply-chain transformation, with ten Rapid Deployment Centers serving more than half of U.S. stores as of November 17, 2009.
Outlook, risks and unusual items
- The filing provides no specific numerical sales, earnings or EPS guidance. Management’s liquidity outlook was that available cash, operating cash flow and financing access would support planned spending and obligations.
- Rationalization actions included removing about 50 U.S. stores from the pipeline, closing 15 underperforming stores, exiting EXPO, THD Design Center, Yardbirds and HD Bath, and restructuring support functions. Pretax charges were $146 for the first nine months of FY2009, including $9 in Q3; estimated remaining charges were $18.
- Management highlighted risks from the economic environment, weak housing and renovation activity, reduced consumer spending and confidence, constrained mortgage, consumer and commercial credit, delinquencies, and supplier disruptions. It also cautioned that forward-looking statements are subject to risks and uncertainties.
- The company entered a $500 million forward-starting interest-rate swap in November 2009 to hedge rate fluctuations ahead of anticipated debt issuance to refinance fiscal 2010 maturities. No material change in market-risk exposure was reported.
- KPMG performed an interim review, not an audit, and reported that it was not aware of material modifications needed for the interim statements to conform with U.S. GAAP. Management said disclosure controls were effective and reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the source filing is for Q3 FY2009, not Q3 2008.
- Assess whether sales and comparable-store trends stabilize given continued housing-market and consumer-spending weakness.
- Review the sustainability of margin gains and cost controls as sales remain lower.
- Track debt maturities, the planned $750 million repayment, and refinancing plans for fiscal 2010 maturities.
- Distinguish GAAP results from management’s non-GAAP results excluding rationalization charges and exited-business sales; verify the assumptions behind these adjustments.