Business context and reporting period
The Home Depot, Inc. is a North American home improvement retailer operating 2,269 stores in the U.S., Canada and Mexico. This 10-K reports fiscal 2014, the 52 weeks ended February 1, 2015, with fiscal 2013 as the principal comparison. The request metadata refers to “2013 Q4,” but the filing is for fiscal 2014; it also provides fourth-quarter results separately.
Financial performance and position
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Net sales | $83.2 billion | $78.8 billion |
| Comparable-store sales growth | 5.3% | 6.8% |
| Gross profit / margin | $29.0 billion / 34.8% | $27.4 billion / 34.8% |
| Operating income / margin | $10.5 billion / 12.6% | $9.2 billion / 11.6% |
| Net earnings / net margin | $6.3 billion / 7.6% | $5.4 billion / 6.8% |
| Diluted earnings per share | $4.71 | $3.76 |
| Cash from operations | $8.2 billion | $7.6 billion |
| Capital expenditures | $1.4 billion | $1.4 billion |
Fourth-quarter fiscal 2014 sales were $19.2 billion and net earnings were $1.4 billion; diluted EPS was $1.05, versus $17.7 billion, $1.0 billion and $0.73, respectively, in fiscal 2013’s fourth quarter.
At year-end, cash and cash equivalents were $1.7 billion; working capital was $4.0 billion and the current ratio was 1.36. Long-term debt was $16.9 billion, with $290 million of commercial paper outstanding. The debt schedule reports $16.9 billion of total debt, including capital leases. Operating cash flow funded investment and shareholder returns: the company repurchased $7.0 billion of shares and paid $2.5 billion in dividends. Inventory turnover was 4.7 times, up from 4.6 times.
Changes versus the prior period
- Sales rose 5.5%; comparable-store growth slowed to 5.3% from 6.8%, while U.S. comparable-store sales increased 6.1%.
- Net earnings increased 17.8% and diluted EPS increased 25.3%. Lower share count from repurchases contributed to EPS growth.
- Operating margin expanded to 12.6% from 11.6%, primarily reflecting sales leverage and expense control. Gross margin was unchanged at 34.8%.
- Fiscal 2014 earnings included a $323 million pretax gain on sales of HD Supply shares and $33 million of net pretax data-breach expenses. Management said the gain added $0.15 to diluted EPS and breach costs reduced it by $0.02.
- Long-term debt increased from $14.7 billion to $16.9 billion; stockholders’ equity declined from $12.5 billion to $9.3 billion. The filing reports long-term debt-to-equity of 181.0%, versus 117.3%.
Outlook, risks and unusual items
The filing does not provide a clear quantified fiscal 2015 sales or earnings forecast. Management cited an improving U.S. home-improvement market and continued investment in interconnected retail, supply-chain capability and customer service. Online sales rose 36.9% and represented approximately 4.5% of sales; management planned a further direct-fulfillment center and continued delivery initiatives. Management stated that cash, operating cash flow and access to debt markets should cover operating needs, capital spending, dividends, repurchases and debt payments over the next several years.
The most significant disclosed uncertainty is the 2014 payment-data breach: payment data for as many as 56 million customers and approximately 53 million email addresses were accessed. The company recorded $63 million of expenses, offset by $30 million of expected insurance proceeds, and had received $10 million in reimbursements by year-end. At least 57 lawsuits and government investigations were pending. Management considered payment-card-network claims probable and anticipated a loss, but could not estimate a range; it warned the ultimate cost could be material. The fiscal 2014 insurance limit was $100 million, subject to a $7.5 million deductible.
Other risks include intense retail and online competition; sensitivity to housing, economic conditions and weather; cybersecurity and payment-system exposures; supplier and logistics interruptions; execution risks in technology and supply-chain investments; labor and regulatory costs; and commodity-price volatility. The company reported that disclosure controls and internal control over financial reporting were effective, and its auditor issued unqualified opinions.
Important facts for investors to verify
- Subsequent disclosures on payment-card claims, litigation, investigations, insurance recovery and total breach-related costs; the filing does not estimate the potential loss range.
- Whether the $323 million HD Supply gain and ongoing share repurchases affect comparisons of recurring earnings and per-share growth.
- Debt maturities, refinancing needs and leverage relative to shareholder returns; the filing lists $3.1 billion of maturities in fiscal 2016 and $11.5 billion thereafter.
- Whether comparable-store growth and margin expansion are sustained as growth moderated from fiscal 2013.
- Progress and costs for online fulfillment, delivery and supply-chain initiatives, and whether the stated liquidity outlook remains adequate.