Business context and reporting period
The filing is Home Depot’s Form 10-K for fiscal 2019, the 52 weeks ended February 2, 2020—not a standalone fiscal 2018 Q4 filing. Fiscal 2018 had 53 weeks; its fourth quarter had 14 weeks, compared with 13 weeks in fiscal 2019. The company operates 2,291 home-improvement stores in the U.S., Canada and Mexico, alongside online sales and services.
Financial and operating performance
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales | $110.2 billion | $108.2 billion |
| Comparable sales | +3.5% | +5.2% |
| Gross profit margin | 34.1% | 34.3% |
| Operating income | $15.8 billion | $15.5 billion |
| Net earnings | $11.2 billion | $11.1 billion |
| Diluted EPS | $10.25 | $9.73 |
| Cash from operations | $13.7 billion | $13.0 billion |
Fiscal 2019 sales increased 1.9% as positive comparable sales were partly offset by the extra week in fiscal 2018, which contributed approximately $1.7 billion of prior-year sales. Online sales were 9.3% of net sales and grew 19.4%. Fourth-quarter fiscal 2019 net sales were $25.8 billion versus $26.5 billion in the prior-year quarter; net earnings were $2.5 billion versus $2.3 billion, and diluted EPS was $2.28 versus $2.09. The prior quarter’s extra week makes the reported quarterly sales comparison less directly comparable.
Gross profit rose 1.1%, but margin declined 20 basis points, primarily from higher shrink and product mix. SG&A was 17.9% of sales versus 18.0%, reflecting expense leverage and cost control partly offset by strategic investment spending. Interest and other, net, increased to $1.1 billion from $974 million, mainly due to higher debt balances. The effective tax rate was 23.6% in both years; fiscal 2018 EPS included a $1.48-per-share Tax Act benefit, while fiscal 2019 EPS included a $0.17-per-share benefit from stock compensation and other discrete tax items.
Cash, debt and liquidity
At February 2, 2020, cash and cash equivalents were $2.1 billion, including $1.8 billion held by foreign subsidiaries. Working capital was $1.4 billion. Reported short-term debt was $974 million; long-term debt, including current installments, totaled approximately $30.5 billion. Operating lease liabilities of $5.9 billion were recognized following adoption of the new lease standard. Operating cash flow of $13.7 billion funded $2.7 billion of capital expenditures, $6.0 billion of dividends and $7.0 billion of share repurchases, alongside debt activity. Stockholders’ deficit was $3.1 billion.
Material changes, outlook and risks
- The company continued its approximately $11 billion multi-year One Home Depot investment program, including about $1.2 billion for the One Supply Chain network. Fiscal 2020 capital expenditures were expected to be approximately $2.8 billion, subject to possible adjustment for COVID-19.
- In February 2020, Home Depot announced a 10% increase in its quarterly dividend to $1.50 per share. In March 2020, it suspended share repurchases and expanded commercial-paper capacity from $3 billion to $6 billion, supported by an additional $3.5 billion credit facility.
- Management said COVID-19 could affect supply, store operations, customer demand, costs, results and liquidity, but could not reasonably estimate the impact or its duration. Store hours were reduced, associate paid time off expanded, some support work shifted remotely, and certain services were stopped or delayed in some jurisdictions. The filing provides no specific earnings or sales guidance.
- Key risks include intense retail and online competition, execution and cost risks from strategic technology and supply-chain investments, cybersecurity and privacy threats, supply disruptions and tariffs, commodity-price volatility, labor costs, weather and housing-market sensitivity, and pandemic-related disruption.
- The company is cooperating with the EPA and Department of Justice on an investigation concerning lead-safe work practices in certain installation jobs; the filing does not provide a clear estimate of potential exposure. It also reports ordinary-course litigation and tax examinations, with management not expecting material effects from the matters described.
- Fiscal 2019 was the first year applying the new lease accounting standard; adoption added approximately $5.7 billion of operating lease right-of-use assets and $6.0 billion of lease liabilities at transition, without a material effect on earnings or cash flows. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Separate the 52-week fiscal 2019 results from fiscal 2018’s 53-week results, especially for quarterly and reported sales comparisons.
- Track COVID-19 effects on customer demand, store and service availability, supplier operations, labor costs, capital spending and liquidity; management had no quantified estimate at filing.
- Monitor whether comparable-sales growth and digital momentum persist while shrink and product mix pressure gross margin.
- Review debt maturities, interest costs, lease obligations and access to commercial-paper and debt markets, alongside the company’s suspension of buybacks.
- Follow developments in the EPA/DOJ lead-safe work-practices investigation and the company’s tax examinations; potential outcomes are uncertain.